1

Republic of the Philippines

SUPREME COURT
FIRST DIVISION
G.R. No. 161135. April 8, 2005
SWAGMAN HOTELS AND TRAVEL, INC., Petitioners,
vs.
HON. COURT OF APPEALS, and NEAL B. CHRISTIAN, Respondents.
DECISION
DAVIDE, JR., C.J.:
May a complaint that lacks a cause of action at the time it was filed be cured by the accrual of a cause of action
during the pendency of the case? This is the basic issue raised in this petition for the Courts consideration.
Sometime in 1996 and 1997, petitioner Swagman Hotels and Travel, Inc., through Atty. Leonor L. Infante and Rodney
David Hegerty, its president and vice-president, respectively, obtained from private respondent Neal B. Christian
loans evidenced by three promissory notes dated 7 August 1996, 14 March 1997, and 14 July 1997. Each of the
promissory notes is in the amount of US$50,000 payable after three years from its date with an interest of 15% per
annum payable every three months.1 In a letter dated 16 December 1998, Christian informed the petitioner
corporation that he was terminating the loans and demanded from the latter payment in the total amount of
US$150,000 plus unpaid interests in the total amount of US$13,500. 2
On 2 February 1999, private respondent Christian filed with the Regional Trial Court of Baguio City, Branch 59, a
complaint for a sum of money and damages against the petitioner corporation, Hegerty, and Atty. Infante. The
complaint alleged as follows: On 7 August 1996, 14 March 1997, and 14 July 1997, the petitioner, as well as its
president and vice-president obtained loans from him in the total amount of US$150,000 payable after three years,
with an interest of 15% per annum payable quarterly or every three months. For a while, they paid an interest of 15%
per annum every three months in accordance with the three promissory notes. However, starting January 1998 until
December 1998, they paid him only an interest of 6% per annum, instead of 15% per annum, in violation of the terms
of the three promissory notes. Thus, Christian prayed that the trial court order them to pay him jointly and solidarily
the amount of US$150,000 representing the total amount of the loans; US$13,500 representing unpaid interests from
January 1998 until December 1998; P100,000 for moral damages; P50,000 for attorneys fees; and the cost of the
suit.3
The petitioner corporation, together with its president and vice-president, filed an Answer raising as defenses lack of
cause of action and novation of the principal obligations. According to them, Christian had no cause of action because
the three promissory notes were not yet due and demandable. In December 1997, since the petitioner corporation
was experiencing huge losses due to the Asian financial crisis, Christian agreed (a) to waive the interest of 15% per
annum, and (b) accept payments of the principal loans in installment basis, the amount and period of which would
depend on the state of business of the petitioner corporation. Thus, the petitioner paid Christian capital repayment in
the amount of US$750 per month from January 1998 until the time the complaint was filed in February 1999. The
petitioner and its co-defendants then prayed that the complaint be dismissed and that Christian be ordered to pay P1
million as moral damages; P500,000 as exemplary damages; and P100,000 as attorneys fees.4
In due course and after hearing, the trial court rendered a decision 5 on 5 May 2000 declaring the first two promissory
notes dated 7 August 1996 and 14 March 1997 as already due and demandable and that the interest on the loans
had been reduced by the parties from 15% to 6% per annum. It then ordered the petitioner corporation to pay
Christian the amount of $100,000 representing the principal obligation covered by the promissory notes dated 7
August 1996 and 14 March 1997, "plus interest of 6% per month thereon until fully paid, with all interest payments
already paid by the defendant to the plaintiff to be deducted therefrom."
The trial court ratiocinated in this wise:
(1) There was no novation of defendants obligation to the plaintiff. Under Article 1292 of the Civil Code, there is an
implied novation only if the old and the new obligation be on every point incompatible with one another.
The test of incompatibility between the two obligations or contracts, according to an imminent author, is whether they
can stand together, each one having an independent existence. If they cannot, they are incompatible, and the
subsequent obligation novates the first (Tolentino, Civil Code of the Philippines, Vol. IV, 1991 ed., p. 384). Otherwise,
the old obligation will continue to subsist subject to the modifications agreed upon by the parties. Thus, it has been
written that accidental modifications in an existing obligation do not extinguish it by novation. Mere modifications of
the debt agreed upon between the parties do not constitute novation. When the changes refer to secondary

2
agreement and not to the object or principal conditions of the contract, there is no novation; such changes will
produce modifications of incidental facts, but will not extinguish the original obligation. Thus, the acceptance of partial
payments or a partial remission does not involve novation (id., p. 387). Neither does the reduction of the amount of an
obligation amount to a novation because it only means a partial remission or condonation of the same debt.
In the instant case, the Court is of the view that the parties merely intended to change the rate of interest from 15%
per annum to 6% per annum when the defendant started paying $750 per month which payments were all accepted
by the plaintiff from January 1998 onward. The payment of the principal obligation, however, remains unaffected
which means that the defendant should still pay the plaintiff $50,000 on August 9, 1999, March 14, 2000 and July 14,
2000.
(2) When the instant case was filed on February 2, 1999, none of the promissory notes was due and demandable. As
of this date however, the first and the second promissory notes have already matured. Hence, payment is already
due.
Under Section 5 of Rule 10 of the 1997 Rules of Civil Procedure, a complaint which states no cause of action may be
cured by evidence presented without objection. Thus, even if the plaintiff had no cause of action at the time he filed
the instant complaint, as defendants obligation are not yet due and demandable then, he may nevertheless recover
on the first two promissory notes in view of the introduction of evidence showing that the obligations covered by the
two promissory notes are now due and demandable.
(3) Individual defendants Rodney Hegerty and Atty. Leonor L. Infante can not be held personally liable for the
obligations contracted by the defendant corporation it being clear that they merely acted in representation of the
defendant corporation in their capacity as General Manager and President, respectively, when they signed the
promissory notes as evidenced by Board Resolution No. 1(94) passed by the Board of Directors of the defendant
corporation (Exhibit "4").6
In its decision7 of 5 September 2003, the Court of Appeals denied petitioners appeal and affirmed in toto the decision
of the trial court, holding as follows:
In the case at bench, there is no incompatibility because the changes referred to by appellant Swagman consist only
in the manner of payment. . . .
Appellant Swagmans interpretation that the three (3) promissory notes have been novated by reason of appellee
Christians acceptance of the monthly payments of US$750.00 as capital repayments continuously even after the
filing of the instant case is a little bit strained considering the stiff requirements of the law on novation that the
intention to novate must appear by express agreement of the parties, or by their acts that are too clear and
unequivocal to be mistaken. Under the circumstances, the more reasonable interpretation of the act of the appellee
Christian in receiving the monthly payments of US$750.00 is that appellee Christian merely allowed appellant
Swagman to pay whatever amount the latter is capable of. This interpretation is supported by the letter of demand
dated December 16, 1998 wherein appellee Christian demanded from appellant Swagman to return the principal loan
in the amount of US$150,000 plus unpaid interest in the amount of US$13,500.00
...
Appellant Swagman, likewise, contends that, at the time of the filing of the complaint, appellee Christian ha[d] no
cause of action because none of the promissory notes was due and demandable.
Again, We are not persuaded.
...
In the case at bench, while it is true that appellant Swagman raised in its Answer the issue of prematurity in the filing
of the complaint, appellant Swagman nonetheless failed to object to appellee Christians presentation of evidence to
the effect that the promissory notes have become due and demandable.
The afore-quoted rule allows a complaint which states no cause of action to be cured either by evidence presented
without objection or, in the event of an objection sustained by the court, by an amendment of the complaint with leave
of court (Herrera, Remedial Law, Vol. VII, 1997 ed., p. 108). 8
Its motion for reconsideration having been denied by the Court of Appeals in its Resolution of 4 December 2003, 9the
petitioner came to this Court raising the following issues:
I. WHERE THE DECISION OF THE TRIAL COURT DROPPING TWO DEFENDANTS HAS BECOME FINAL AND
EXECUTORY, MAY THE RESPONDENT COURT OF APPEALS STILL STUBBORNLY CONSIDER THEM AS
APPELLANTS WHEN THEY DID NOT APPEAL?

3
ii. Where there is no cause of action, is the decision of the lower court valid?
III. MAY THE RESPONDENT COURT OF APPEALS VALIDLY AFFIRM A DECISION OF THE LOWER COURT
WHICH IS INVALID DUE TO LACK OF CAUSE OF ACTION?
IV. Where there is a valid novation, may the original terms of contract which has been novated still prevail? 10
The petitioner harps on the absence of a cause of action at the time the private respondents complaint was filed with
the trial court. In connection with this, the petitioner raises the issue of novation by arguing that its obligations under
the three promissory notes were novated by the renegotiation that happened in December 1997 wherein the private
respondent agreed to waive the interest in each of the three promissory notes and to accept US$750 per month as
installment payment for the principal loans in the total amount of US$150,000. Lastly, the petitioner questions the act
of the Court of Appeals in considering Hegerty and Infante as appellants when they no longer appealed because the
trial court had already absolved them of the liability of the petitioner corporation.
On the other hand, the private respondent asserts that this petition is "a mere ploy to continue delaying the payment
of a just obligation." Anent the fact that Hegerty and Atty. Infante were considered by the Court of Appeals as
appellants, the private respondent finds it immaterial because they are not affected by the assailed decision anyway.
Cause of action, as defined in Section 2, Rule 2 of the 1997 Rules of Civil Procedure, is the act or omission by which
a party violates the right of another. Its essential elements are as follows:
1. A right in favor of the plaintiff by whatever means and under whatever law it arises or is created;
2. An obligation on the part of the named defendant to respect or not to violate such right; and
3. Act or omission on the part of such defendant in violation of the right of the plaintiff or constituting a breach of the
obligation of the defendant to the plaintiff for which the latter may maintain an action for recovery of damages or other
appropriate relief.11
It is, thus, only upon the occurrence of the last element that a cause of action arises, giving the plaintiff the right to
maintain an action in court for recovery of damages or other appropriate relief.
It is undisputed that the three promissory notes were for the amount of P50,000 each and uniformly provided for (1) a
term of three years; (2) an interest of 15 % per annum, payable quarterly; and (3) the repayment of the principal loans
after three years from their respective dates. However, both the Court of Appeals and the trial court found that a
renegotiation of the three promissory notes indeed happened in December 1997 between the private respondent and
the petitioner resulting in the reduction not waiver of the interest from 15% to 6% per annum, which from then on
was payable monthly, instead of quarterly. The term of the principal loans remained unchanged in that they were still
due three years from the respective dates of the promissory notes. Thus, at the time the complaint was filed with the
trial court on 2 February 1999, none of the three promissory notes was due yet; although, two of the promissory notes
with the due dates of 7 August 1999 and 14 March 2000 matured during the pendency of the case with the trial court.
Both courts also found that the petitioner had been religiously paying the private respondent US$750 per month from
January 1998 and even during the pendency of the case before the trial court and that the private respondent had
accepted all these monthly payments.
With these findings of facts, it has become glaringly obvious that when the complaint for a sum of money and
damages was filed with the trial court on 2 February 1999, no cause of action has as yet existed because the
petitioner had not committed any act in violation of the terms of the three promissory notes as modified by the
renegotiation in December 1997. Without a cause of action, the private respondent had no right to maintain an action
in court, and the trial court should have therefore dismissed his complaint.
Despite its finding that the petitioner corporation did not violate the modified terms of the three promissory notes and
that the payment of the principal loans were not yet due when the complaint was filed, the trial court did not dismiss
the complaint, citing Section 5, Rule 10 of the 1997 Rules of Civil Procedure, which reads:
Section 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by the
pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they
had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform
to the evidence and to raise these issues may be made upon motion of any party at any time, even after judgment;
but failure to amend does not affect the result of the trial of these issues. If evidence is objected to at the trial on the
ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and
shall do so with liberality if the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment to be made.

4
According to the trial court, and sustained by the Court of Appeals, this Section allows a complaint that does not state
a cause of action to be cured by evidence presented without objection during the trial. Thus, it ruled that even if the
private respondent had no cause of action when he filed the complaint for a sum of money and damages because
none of the three promissory notes was due yet, he could nevertheless recover on the first two promissory notes
dated 7 August 1996 and 14 March 1997, which became due during the pendency of the case in view of the
introduction of evidence of their maturity during the trial.
Such interpretation of Section 5, Rule 10 of the 1997 Rules of Civil Procedure is erroneous.
Amendments of pleadings are allowed under Rule 10 of the 1997 Rules of Civil Procedure in order that the actual
merits of a case may be determined in the most expeditious and inexpensive manner without regard to technicalities,
and that all other matters included in the case may be determined in a single proceeding, thereby avoiding multiplicity
of suits.12 Section 5 thereof applies to situations wherein evidence not within the issues raised in the pleadings is
presented by the parties during the trial, and to conform to such evidence the pleadings are subsequently amended
on motion of a party. Thus, a complaint which fails to state a cause of action may be cured by evidence presented
during the trial.
However, the curing effect under Section 5 is applicable only if a cause of action in fact exists at the time the
complaint is filed, but the complaint is defective for failure to allege the essential facts. For example, if a complaint
failed to allege the fulfillment of a condition precedent upon which the cause of action depends, evidence showing
that such condition had already been fulfilled when the complaint was filed may be presented during the trial, and the
complaint may accordingly be amended thereafter.13 Thus, in Roces v. Jalandoni,14 this Court upheld the trial court in
taking cognizance of an otherwise defective complaint which was later cured by the testimony of the plaintiff during
the trial. In that case, there was in fact a cause of action and the only problem was the insufficiency of the allegations
in the complaint. This ruling was reiterated in Pascua v. Court of Appeals.15
It thus follows that a complaint whose cause of action has not yet accrued cannot be cured or remedied by an
amended or supplemental pleading alleging the existence or accrual of a cause of action while the case is
pending.16 Such an action is prematurely brought and is, therefore, a groundless suit, which should be dismissed by
the court upon proper motion seasonably filed by the defendant. The underlying reason for this rule is that a person
should not be summoned before the public tribunals to answer for complaints which are immature. As this Court
eloquently said in Surigao Mine Exploration Co., Inc. v. Harris:17
It is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must
be some cause of action at the commencement of the suit. As observed by counsel for appellees, there are
reasons of public policy why there should be no needless haste in bringing up litigation, and why people who are in no
default and against whom there is yet no cause of action should not be summoned before the public tribunals to
answer complaints which are groundless. We say groundless because if the action is immature, it should not be
entertained, and an action prematurely brought is a groundless suit.
It is true that an amended complaint and the answer thereto take the place of the originals which are thereby
regarded as abandoned (Reynes vs. Compaa General de Tabacos [1912], 21 Phil. 416; Ruyman and Farris vs.
Director of Lands [1916], 34 Phil., 428) and that "the complaint and answer having been superseded by the amended
complaint and answer thereto, and the answer to the original complaint not having been presented in evidence as an
exhibit, the trial court was not authorized to take it into account." (Bastida vs. Menzi & Co. [1933], 58 Phil., 188.) But in
none of these cases or in any other case have we held that if a right of action did not exist when the original complaint
was filed, one could be created by filing an amended complaint. In some jurisdictions in the United States what was
termed an "imperfect cause of action" could be perfected by suitable amendment (Brown vs. Galena Mining &
Smelting Co., 32 Kan., 528; Hooper vs. City of Atlanta, 26 Ga. App., 221) and this is virtually permitted in Banzon and
Rosauro vs. Sellner ([1933], 58 Phil., 453); Asiatic Potroleum [sic] Co. vs. Veloso ([1935], 62 Phil., 683); and recently
in Ramos vs. Gibbon (38 Off. Gaz., 241). That, however, which is no cause of action whatsoever cannot by
amendment or supplemental pleading be converted into a cause of action: Nihil de re accrescit ei qui nihil in re
quando jus accresceret habet.
We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and subsisting cause of action
at the time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of
one while the action is pending, and a supplemental complaint or an amendment setting up such afteraccrued cause of action is not permissible. (Emphasis ours).
Hence, contrary to the holding of the trial court and the Court of Appeals, the defect of lack of cause of action at the
commencement of this suit cannot be cured by the accrual of a cause of action during the pendency of this case
arising from the alleged maturity of two of the promissory notes on 7 August 1999 and 14 March 2000.
Anent the issue of novation, this Court observes that the petitioner corporation argues the existence of novation
based on its own version of what transpired during the renegotiation of the three promissory notes in December 1997.
By using its own version of facts, the petitioner is, in a way, questioning the findings of facts of the trial court and the
Court of Appeals.

5
As a rule, the findings of fact of the trial court and the Court of Appeals are final and conclusive and cannot be
reviewed on appeal to the Supreme Court18 as long as they are borne out by the record or are based on substantial
evidence.19 The Supreme Court is not a trier of facts, its jurisdiction being limited to reviewing only errors of law that
may have been committed by the lower courts. Among the exceptions is when the finding of fact of the trial court or
the Court of Appeals is not supported by the evidence on record or is based on a misapprehension of facts. Such
exception obtains in the present case.20
This Court finds to be contrary to the evidence on record the finding of both the trial court and the Court of Appeals
that the renegotiation in December 1997 resulted in the reduction of the interest from 15% to 6% per annum and that
the monthly payments of US$750 made by the petitioner were for the reduced interests.
It is worthy to note that the cash voucher dated January 1998 21 states that the payment of US$750 represents
"INVESTMENT PAYMENT." All the succeeding cash vouchers describe the payments from February 1998 to
September 1999 as "CAPITAL REPAYMENT." 22 All these cash vouchers served as receipts evidencing private
respondents acknowledgment of the payments made by the petitioner: two of which were signed by the private
respondent himself and all the others were signed by his representatives. The private respondent even identified and
confirmed the existence of these receipts during the hearing. 23 Significantly, cognizant of these receipts, the private
respondent applied these payments to the three consolidated principal loans in the summary of payments he
submitted to the court.24
Under Article 1253 of the Civil Code, if the debt produces interest, payment of the principal shall not be deemed to
have been made until the interest has been covered. In this case, the private respondent would not have signed the
receipts describing the payments made by the petitioner as "capital repayment" if the obligation to pay the interest
was still subsisting. The receipts, as well as private respondents summary of payments, lend credence to petitioners
claim that the payments were for the principal loans and that the interests on the three consolidated loans were
waived by the private respondent during the undisputed renegotiation of the loans on account of the business
reverses suffered by the petitioner at the time.
There was therefore a novation of the terms of the three promissory notes in that the interest was waived and the
principal was payable in monthly installments of US$750. Alterations of the terms and conditions of the obligation
would generally result only in modificatory novation unless such terms and conditions are considered to be the
essence of the obligation itself.25 The resulting novation in this case was, therefore, of the modificatory type, not the
extinctive type, since the obligation to pay a sum of money remains in force.
Thus, since the petitioner did not renege on its obligation to pay the monthly installments conformably with their new
agreement and even continued paying during the pendency of the case, the private respondent had no cause of
action to file the complaint. It is only upon petitioners default in the payment of the monthly amortizations that a cause
of action would arise and give the private respondent a right to maintain an action against the petitioner.
Lastly, the petitioner contends that the Court of Appeals obstinately included its President Infante and Vice-President
Hegerty as appellants even if they did not appeal the trial courts decision since they were found to be not personally
liable for the obligation of the petitioner. Indeed, the Court of Appeals erred in referring to them as defendantsappellants; nevertheless, that error is no cause for alarm because its ruling was clear that the petitioner corporation
was the one solely liable for its obligation. In fact, the Court of Appeals affirmed in toto the decision of the trial court,
which means that it also upheld the latters ruling that Hegerty and Infante were not personally liable for the pecuniary
obligations of the petitioner to the private respondent.
In sum, based on our disquisition on the lack of cause of action when the complaint for sum of money and damages
was filed by the private respondent, the petition in the case at bar is impressed with merit.
WHEREFORE, the petition is hereby GRANTED. The Decision of 5 September 2003 of the Court of Appeals in CAG.R. CV No. 68109, which affirmed the Decision of 5 May 2000 of the Regional Trial Court of Baguio, Branch 59,
granting in part private respondents complaint for sum of money and damages, and its Resolution of 4 December
2003, which denied petitioners motion for reconsideration are hereby REVERSED and SET ASIDE. The complaint
docketed as Civil Case No. 4282-R is hereby DISMISSED for lack of cause of action. No costs. SO ORDERED.
Republic of the Philippines
SUPREME COURT
SECOND DIVISION
G.R. No. 152346 November 25, 2005
ISAIAS F. FABRIGAS and MARCELINA R. FABRIGAS, Petitioners,
vs.
SAN FRANCISCO DEL MONTE, INC., Respondent.

6
DECISION
Tinga, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, which
assails the Decision of the Court of Appeals in CA-G.R. CV No. 45203 and its Resolution therein denying petitioners
motion for reconsideration. Said Decision affirmed the Decision dated January 3, 1994 of the Regional Trial Court
(RTC), Branch 63, Makati City in Civil Case No. 90-2711 entitled San Francisco Del Monte, Inc. v. Isaias F. Fabrigas
and Marcelina R. Fabrigas.
The dispositive portion of the trial courts Decision reads:
In the light of the foregoing, the Court is convinced that plaintiff has proven by preponderance of evidence, the
allegation appearing in its complaint and is therefore, entitled to the reliefs prayed for.
Considering, however, that defendants had already paid P78,152.00, the Court exercising its discretion, hereby
renders judgment as follows:
1. Ordering defendant to make complete payment under the conditions of Contract to Sell No. 2491-V dated January
21, 1985, within twenty days from receipt of this Decision, and in the event that defendant fail or refuse to observe the
latter, defendants and all persons claiming right of possession or occupation from defendants are ordered to vacate
and leave the premises, described as Lot No. 9 Block No. 3 of Subdivision Plan (LRC) Psd-50064 covered by
Transfer Certificate of Title No. 4980 (161653) T-1083 of the Registry of Deeds of Rizal, and to surrender possession
thereof to plaintiff or any of its authorized representatives;
2. That in the event that defendants chose to surrender possession of the property, they are further ordered to pay
plaintiff P206,223.80 as unpaid installments on the land inclusive of interests;
3. Ordering defendants to jointly and severally pay plaintiff the amount of P10,000.00 as and for attorneys fees; and
4. Ordering defendants to pay the costs of suit.
SO ORDERED.1
The following factual antecedents are matters of record.
On April 23, 1983, herein petitioner spouses Isaias and Marcelina Fabrigas ("Spouses Fabrigas" or "petitioners") and
respondent San Francisco Del Monte, Inc. ("Del Monte") entered into an agreement, denominated as Contract to Sell
No. 2482-V, whereby the latter agreed to sell to Spouses Fabrigas a parcel of residential land situated in Barrio
Almanza, Las Pias, Manila for and in consideration of the amount of P109,200.00. Said property, which is known as
Lot No. 9, Block No. 3 of Subdivision Plan (LRC) Psd-50064, is covered by Transfer Certificate of Title No. 4980
(161653) T-1083 registered in the name of respondent Del Monte. The agreement stipulated that Spouses Fabrigas
shall pay P30,000.00 as downpayment and the balance within ten (10) years in monthly successive installments
of P1,285.69.2 Among the clauses in the contract is an automatic cancellation clause in case of default, which states
as follows:
7. Should the PURCHASER fail to make any of the payments including interest as herein provided, within 30 days
after the due date, this contract will be deemed and considered as forfeited and annulled without necessity of notice
to the PURCHASER, and said SELLER shall be at liberty to dispose of the said parcel of land to any other person in
the same manner as if this contract had never been executed. In the event of such forfeiture, all sums of money paid
under this contract will be considered and treated as rentals for the use of said parcel of land, and the PURCHASER
hereby waives all right to ask or demand the return thereof and agrees to peaceably vacate the said premises. 3
After paying P30,000.00, Spouses Fabrigas took possession of the property but failed to make any installment
payments on the balance of the purchase price. Del Monte sent demand letters on four occasions to remind Spouses
Fabrigas to satisfy their contractual obligation. 4 In particular, Del Montes third letter dated November 9, 1983
demanded the payment of arrears in the amount of P8,999.00. Said notice granted Spouses Fabrigas a fifteen-day
grace period within which to settle their accounts. Petitioners failure to heed Del Montes demands prompted the
latter to send a final demand letter dated December 7, 1983, granting Spouses Fabrigas another grace period of
fifteen days within which to pay the overdue amount and warned them that their failure to satisfy their obligation would
cause the rescission of the contract and the forfeiture of the sums of money already paid. Petitioners received Del
Montes final demand letter on December 23, 1983. Del Monte considered Contract to Sell No. 2482-V cancelled
fifteen days thereafter, but did not furnish petitioners any notice regarding its cancellation. 5
On November 6, 1984, petitioner Marcelina Fabrigas ("petitioner Marcelina") remitted the amount of P13,000.00 to
Del Monte.6 On January 12, 1985, petitioner Marcelina again remitted the amount of P12,000.00.7 A few days

7
thereafter, or on January 21, 1985, petitioner Marcelina and Del Monte entered into another agreement denominated
as Contract to Sell No. 2491-V, covering the same property but under restructured terms of payment. Under the
second contract, the parties agreed on a new purchase price of P131,642.58, the amount ofP26,328.52 as
downpayment and the balance to be paid in monthly installments of P2,984.60 each.8
Between March 1985 and January 1986, Spouses Fabrigas made irregular payments under Contract to Sell No.
2491-V, to wit:
March 19, 1985 P1, 328.52
July 2, 1985 P2, 600.00
September 30, 1985 P2, 600.00
November 27, 1985 P2, 600.00
January 20, 1986 P2, 000.009
Del Monte sent a demand letter dated February 3, 1986, informing petitioners of their overdue account equivalent to
nine (9) installments or a total amount of P26,861.40. Del Monte required petitioners to satisfy said amount
immediately in two subsequent letters dated March 5 and April 2, 1986. 10 This prompted petitioners to pay the
following amounts:
February 3, 1986 P2, 000.00
March 10, 1986 P2, 000.00
April 9, 1986 P2, 000.00
May 13, 1986 P2, 000.00
June 6, 1986 P2, 000.00
July 14, 1986 P2, 000.0011
No other payments were made by petitioners except the amount of P10,000.00 which petitioners tendered sometime
in October 1987 but which Del Monte refused to accept, the latter claiming that the payment was intended for the
satisfaction of Contract to Sell No. 2482-V which had already been previously cancelled. On March 24, 1988, Del
Monte sent a letter demanding the payment of accrued installments under Contract to Sell No. 2491-V in the amount
of P165,759.60 less P48,128.52, representing the payments made under the restructured contract, or the net amount
of P117,631.08. Del Monte allowed petitioners a grace period of thirty (30) days within which to pay the amount asked
to avoid rescission of the contract. For failure to pay, Del Monte notified petitioners on March 30, 1989 that Contract
to Sell No. 2482-V had been cancelled and demanded that petitioners vacate the property.12
On September 28, 1990, Del Monte instituted an action for Recovery of Possession with Damages against Spouses
Fabrigas before the RTC, Branch 63 of Makati City. The complaint alleged that Spouses Fabrigas owed Del Monte
the principal amount of P206,223.80 plus interest of 24% per annum. In their answer, Spouses Fabrigas claimed,
among others, that Del Monte unilaterally cancelled the first contract and forced petitioner Marcelina to execute the
second contract, which materially and unjustly altered the terms and conditions of the original contract. 13
After trial on the merits, the trial court rendered a Decision on January 3, 1994, upholding the validity of Contract to
Sell No. 2491-V and ordering Spouses Fabrigas either to complete payments thereunder or to vacate the property.
Aggrieved, Spouses Fabrigas elevated the matter to the Court of Appeals, arguing that the trial court should have
upheld the validity and existence of Contract to Sell No. 2482-V instead and nullified Contract to Sell No. 2491-V. The
Court of Appeals rejected this argument on the ground that Contract to Sell No. 2482-V had been rescinded pursuant
to the automatic rescission clause therein. While the Court of Appeals declared Contract to Sell No. 2491-V as merely
unenforceable for having been executed without petitioner Marcelinas signature, it upheld its validity upon finding that
the contract was subsequently ratified.
Hence, the instant petition attributing the following errors to the Court of Appeals:
A. THE COURT OF APPEALS GRAVELY ERRED WHEN IT IGNORED THE PROVISIONS OF R.A. NO. 6552 (THE
MACEDA LAW) AND RULED THAT CONTRACT TO SELL NO. 2482-V WAS VALIDLY CANCELLED BY SENDING A
MERE NOTICE TO THE PETITIONERS.

8
B. THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THERE WAS AN IMPLIED RATIFICATION OF
CONTRACT TO SELL NO. 2491-V.
C. THE COURT OF APPEALS ERRED IN ITS APPLICATION OF THE RULES OF NOVATION TO THE INSTANT
CASE.14
As reframed for better understanding, the questions are the following: Was Contract to Sell No. 2482-Vextinguished
through rescission or was it novated by the subsequent Contract to Sell No. 2491-V? If Contract to Sell No. 2482V was rescinded, should the manner of rescission comply with the requirements of Republic Act No. (R.A.) 6552?
If Contract to Sell No. 2482-V was subsequently novated by Contract to Sell No. 2491-V, are petitioners liable for
breach under the subsequent agreement?
Petitioners theorize that Contract to Sell No. 2482-V should remain valid and subsisting because the notice of
cancellation sent by Del Monte did not observe the requisites under Section 3 of R.A. 6552. 15 According to petitioners,
since respondent did not send a notarial notice informing them of the cancellation or rescission ofContract to Sell No.
2482-V and also did not pay them the cash surrender value of the payments on the property, the Court of Appeals
erred in concluding that respondent correctly applied the automatic rescission clause ofContract to Sell No. 2482-V.
Petitioners also cite Section 716 of said law to bolster their theory that the automatic rescission clause in Contract to
Sell No. 2482-V is invalid for being contrary to law and public policy.
The Court of Appeals erred in ruling that Del Monte was "well within its right to cancel the contract by express grant of
paragraph 7 without the need of notifying [petitioners], 17" instead of applying the pertinent provisions of R.A. 6552.
Petitioners contention that none of Del Montes demand letters constituted a valid rescission ofContract to Sell No.
2482-V is correct.
Petitioners defaulted in all monthly installments. They may be credited only with the amount of P30,000.00 paid upon
the execution of Contract to Sell No. 2482-V, which should be deemed equivalent to less than two (2) years
installments. Given the nature of the contract between petitioners and Del Monte, the applicable legal provision on the
mode of cancellation of Contract to Sell No. 2482-V is Section 4 and not Section 3 of R.A. 6552. Section 4 is
applicable to instances where less than two years installments were paid. It reads:
SECTION 4. In case where less than two years of installments were paid, the seller shall give the buyer a grace
period of not less than sixty days from the date the installment became due.
If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract
after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by
a notarial act.
Thus, the cancellation of the contract under Section 4 is a two-step process. First, the seller should extend the buyer
a grace period of at least sixty (60) days from the due date of the installment. Second, at the end of the grace period,
the seller shall furnish the buyer with a notice of cancellation or demand for rescission through a notarial act, effective
thirty (30) days from the buyers receipt thereof. It is worth mentioning, of course, that a mere notice or letter, short of
a notarial act, would not suffice.
While the Court concedes that Del Monte had allowed petitioners a grace period longer than the minimum sixty (60)day requirement under Section 4, it did not comply, however, with the requirement of notice of cancellation or a
demand for rescission. Instead, Del Monte applied the automatic rescission clause of the contract. Contrary, however,
to Del Montes position which the appellate court sustained, the automatic cancellation clause is void under Section
718 in relation to Section 4 of R.A. 6552. 19
Rescission, of course, is not the only mode of extinguishing obligations. Ordinarily, obligations are also extinguished
by payment or performance, by the loss of the thing due, by the condonation or remission of the debt, by the
confusion or merger of the rights of the creditor and debtor, by compensation, or by novation. 20
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results
either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or
subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have
dual functionsone to extinguish an existing obligation, the other to substitute a new one in its placerequiring a
conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new
contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. 21
Notwithstanding the improper rescission, the facts of the case show that Contract to Sell No. 2482-V was
subsequently novated by Contract to Sell No. 2491-V. The execution of Contract to Sell No. 2491-V accompanied an
upward change in the contract price, which constitutes a change in the object or principal conditions of the contract. In
entering into Contract to Sell No. 2491-V, the parties were impelled by causes different from those obtaining

9
under Contract to Sell No. 2482-V. On the part of petitioners, they agreed to the terms and conditions ofContract to
Sell No. 2491-V not only to acquire ownership over the subject property but also to avoid the consequences of their
default under Contract No. 2482-V. On Del Montes end, the upward change in price was the consideration for
entering into Contract to Sell No. 2491-V.
In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each
other.22 The test of incompatibility is whether or not the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation novates the first. 23 The
execution of Contract to Sell No. 2491-V created new obligations in lieu of those under Contract to Sell No. 2482-V,
which are already considered extinguished upon the execution of the second contract. The two contracts do not have
independent existence for to hold otherwise would present an absurd situation where the parties would be liable
under each contract having only one subject matter.
To dispel the novation of Contract to Sell No. 2482-V by Contract to Sell No. 2491-V, petitioners contend that the
subsequent contract is void for two reasons: first, petitioner Isaias Fabrigas did not give his consent thereto, and
second, the subsequent contract is a contract of adhesion.
Petitioner rely on Article 172 of the Civil Code governing their property relations as spouses. Said article states that
the wife cannot bind the conjugal partnership without the husbands consent except in cases provided by law. Since
only petitioner Marcelina executed Contract to Sell No. 2491-V, the same is allegedly void, petitioners conclude.
Under the Civil Code, the husband is the administrator of the conjugal partnership. 24 Unless the wife has been
declared a non compos mentis or a spendthrift, or is under civil interdiction or is confined in a leprosarium, the
husband cannot alienate or encumber any real property of the conjugal partnership without the wife's
consent.25Conversely, the wife cannot bind the conjugal partnership without the husbands consent except in cases
provided by law.26
Thus, if a contract entered into by one spouse involving a conjugal property lacks the consent of the other spouse, as
in the case at bar, is it automatically void for that reason alone?
Article 17327 of the Civil Code expressly classifies a contract executed by the husband without the consent of the wife
as merely annullable at the instance of the wife. However, there is no comparable provision covering an instance
where the wife alone has consented to a contract involving conjugal property. Article 172 of the Civil Code, though,
does not expressly declare as void a contract entered by the wife without the husbands consent. It is also not one of
the contracts considered as void under Article 140928 of the Civil Code.
In Felipe v. Heirs of Maximo Aldon,29 the Court had the occasion to rule on the validity of a sale of lands belonging to
the conjugal partnership made by the wife without the consent of the husband. Speaking through Mr. Justice Abad
Santos, the Court declared such a contract as voidable because one of the parties is incapable of giving consent to
the contract. The capacity to give consent belonged not even to the husband alone but to both
spouses.30 In that case, the Court anchored its ruling on Article 173 of the Civil Code which states that contracts
entered by the husband without the consent of the wife when such consent is required, are annullable at her instance
during the marriage and within ten years from the transaction mentioned. 31
The factual milieu of the instant case, however, differs from that in Felipe. The defect which Contract to Sell No. 2491V suffers from is lack of consent of the husband, who was out of the country at the time of the execution of the
contract. There is no express provision in the Civil Code governing a situation where the husband is absent and his
absence incapacitates him from administering the conjugal partnership property. The following Civil Code provisions,
however, are illuminating:
ARTICLE 167. In case of abuse of powers of administration of the conjugal partnership property by the husband, the
courts, on petition of the wife, may provide for receivership, or administration by the wife, or separation of property.
ARTICLE 168. The wife may, by express authority of the husband embodied in a public instrument, administer the
conjugal partnership property.
ARTICLE 169. The wife may also, by express authority of the husband appearing in a public instrument, administer
the latter's estate.
While the husband is the recognized administrator of the conjugal property under the Civil Code, there are instances
when the wife may assume administrative powers or ask for the separation of property. In the abovementioned
instances, the wife must be authorized either by the court or by the husband. Where the husband is absent and
incapable of administering the conjugal property, the wife must be expressly authorized by the husband or seek
judicial authority to assume powers of administration. Thus, any transaction entered by the wife without the court or

10
the husbands authority is unenforceable in accordance with Article 1317 32 of the Civil Code. That is the status to be
accorded Contract to Sell No. 2491-V, it having been executed by petitioner Marcelina without her husbands
conformity.
Being an unenforceable contract, Contract to Sell No. 2491-V is susceptible to ratification. As found by the courts
below, after being informed of the execution of the contract, the husband, petitioner Isaias Fabrigas, continued
remitting payments for the satisfaction of the obligation under Contract to Sell No. 2491-V. These acts constitute
ratification of the contract. Such ratification cleanses the contract from all its defects from the moment it was
constituted. The factual findings of the courts below are beyond review at this stage.
Anent Del Montes claim that Contract to Sell No. 2491-V is a contract of adhesion, suffice it to say that assuming for
the nonce that the contract is such the characterization does not automatically render it void. A contract of adhesion is
so-called because its terms are prepared by only one party while the other party merely affixes his signature
signifying his adhesion thereto. Such contracts are not void in themselves. They are as binding as ordinary contracts.
Parties who enter into such contracts are free to reject the stipulations entirely.33
The Court quotes with approval the following factual observations of the trial court, which cannot be disturbed in this
case, to wit:
The Court notes that defendant, Marcelina Fabrigas, although she had to sign contract No. 2491-V, to avoid forfeiture
of her downpayment, and her other monthly amortizations, was entirely free to refuse to accept the new contract.
There was no clear case of intimidation or threat on the part of plaintiff in offering the new contract to her. At most,
since she was of sufficient intelligence to discern the agreement she is entering into, her signing of Contract No.
2491-V is taken to be valid and binding. The fact that she has paid monthly amortizations subsequent to the execution
of Contract to Sell No. 2491-V, is an indication that she had recognized the validity of such contract. . . . 34
In sum, Contract to Sell No. 2491-V is valid and binding. There is nothing to prevent respondent Del Monte from
enforcing its contractual stipulations and pursuing the proper court action to hold petitioners liable for their breach
thereof.
WHEREFORE, the instant Petition for Review is DENIED and the September 28, 2001 Decision of the Court of
Appeals in CA-G.R. CV No. 45203 is AFFIRMED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 84220 March 25, 1992

BENJAMIN RODRIGUEZ, petitioner,
vs.
COURT OF APPEALS, and HADJI ESMAYATEN LUCMAN, respondents.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari of the decision of the Court of Appeals affirming a decision of the trial court
which allowed Hadji Esmayaten Lucman as assignee to collect from Benjamin Uy Rodriguez, an indebtedness owed
to the assignor, a Hongkong corporation.
The antecedent facts of the case are as follows:
Petitioner Rodriguez alias Uy Tian Kiu is a businessman from Cebu City whose business, includes the importation of
various commodities from Hongkong which he occasionally ordered from Allied Overseas Commercial Co., Ltd., a
Hongkong corporation. The Managing Director of Allied Overseas Commercial Co., Ltd. is Lin Ping Huang, a close
friend of private respondent Lucman.

11
Petitioner Rodriguez, as a result of business transactions with the Hongkong Corporation, accumulated an
indebtedness owed to Allied Overseas in the amount of HK $418,729.60 which had at that time in 1968 an exchange
value of P540,553.00.
Upon demand for payment by the Hongkong Corporation, the petitioner issued a pay-to-cash check dated September
11, 1970 covering the indebtedness. The check was, however, dishonored for lack of funds, the account having been
closed two months earlier.
Subsequently, the Allied Overseas Commercial Co., Ltd., through its Managing Director, Lin Ping Huang, assigned its
credit to the private respondent. The contract was evidenced by a Deed of Assignment (Exhs. "B-2" and "B-3") duly
executed before Philippine Consular officials in Hongkong. It reads:
That WE, the ALLIED OVERSEAS COMMERCIAL CO., LTD., a commercial association duly
organized and registered in the company's registry of the Crown Colony of Hongkong with offices at
No. 5-7 Des Voeux Road, West, 1st Floor, Hongkong, represented in this instance by its Managing
Director duly authorized by a Board resolution, for and in consideration of HK$ 1 and other valuable
considerations, have on this date assigned, ceded, transferred and conveyed by way of irrevocable
assignment and transferred to Hadji Esmayaten Lucman, Esq., of legal age, Filipino citizen, and a
resident of No. 95-I, A. Lake St., San Juan, Province of Rizal, Republic of the Philippines, our
outstanding and collectible credit due and owing us by and from Benjamin Uy Rodriguez alias Uy Tian
Kiu of Cebu City, Republic of the Philippines, in the total amount of HK$ 418,729.60 or its equivalent in
the Philippine Currency, for said Hadji Esmayaten Lucman to collect and secure from the aforesaid
debtor, Benjamin Uy Rodriguez alias Uy Tian Kiu the aforesaid amount in any manner, including court
proceedings if necessary, in accordance with the provisions of existing laws in the jurisdiction of the
Republic of the Philippines.
We, as creditors assignors of the aforesaid debt, have on this date notified formally the debtor named
herein of this full assignment of the aforesaid credit. (Orig. record, p. 11)
The assignee filed an action to collect the indebtedness. On March 4, 1985, the trial court rendered a decision in favor
of the private respondent. The dispositive portion of the Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against defendant, sentencing
the latter to pay the former the following sums:
(a) P450,553.00 representing defendant's outstanding account to plaintiff's assignor, with interest
thereon at twelve per cent (12%) per annum from the time of the filing of the complaint on February 4,
1971 until fully paid:
(b) P500,000.00 as actual damages;
(c) P100,000.00 as moral damages;
(d) The further sum equivalent to ten (10%) per cent of all the foregoing sums as attorney's fees and
costs of litigation.
Costs against the defendant.
SO ORDERED. (pp. 142-143, Orig. Rec.)
Benjamin Rodriguez appealed the decision to the Court of Appeals and assigned the following as errors committed by
the trial court:
1 Plaintiff is not the real party-in-interest and is therefore, without legal capacity to sue;
2 The obligation does not exist or has not been sufficiently proven to exist;
3 Venue is improperly laid.
After carefully evaluating the evidence presented by the parties, the Court of Appeals rendered the questioned
decision dismissing the appeal for lack of merit. Benjamin Rodriguez filed a motion for reconsideration which was
denied by the appellate court which stated that the arguments submitted in support of the motion were a mere rehash
of the arguments in the Appellant's Brief.
The petitioner is now before us questioning the decision of the Court of Appeals. He specifically relies on the following
as bases for his petition:

12
I. That the judgment in the criminal case cannot be given in evidence in the civil action.
II. That the decision of the Court of Appeals is not in accord with Article 1301 of the New Civil Code which requires
consent to subrogation; and
III. That the award of damages is excessive.
We find the petition devoid of merit.
The petitioner alleges that the only evidence presented by private respondent was the decision of the Court of
Appeals in the case of People v. Lucman (CA G.R. No. 21365-CR) for falsification of commercial document. The case
was filed by the petitioner before the Regional Trial Court of Cebu while the civil case filed by Lucman in the Regional
Trial Court of Pasig was in progress.
The Regional Trial Court of Cebu convicted Lucman but on appeal, the Court of Appeals acquitted him on the basis of
its finding that complainant Rodriguez had indeed an unpaid balance which was sufficiently established by evidence.
The decision in the criminal case was only one of the pieces of evidence relied upon by the respondent court. The
petitioner is giving undue weight to this particular item.
It is clear from the records, both testimonial and documentary that the obligation exists. The documents, all testified to
by private respondent Lucman as well as other witnesses had sufficiently proven that Rodriguez had an unpaid
balance from previous transaction with Allied Overseas Commercial Co., Ltd. which arose from the importation of the
800 bales of Hessian sacks.
The unpaid balance was evidenced by a record of transactions between Allied Overseas Co., Ltd. and Ben
Rodriguez. The statement of account was sent to the petitioner on September 30, 1968 and the receipt portion was
duly signed by him and returned. (Exh. "E-3" and "E-3A")
If the importation was made in the name of Madipo Mercantile this was pursuant to the petitioner's request that his
importations be carried out in the names of different companies. This explains the shipment made to Madipo, a
business firm owned by Wilfredo Tiu, a brother-in-law of Rodriguez. However, the exchange of cables regarding the
importation clearly indicates that Rodriguez was the real importer (Exh. "L", "M", "M-1", "M-2", and "M-3")
The authenticity of the above cable communications has not been impugned by the petitioner.
Lucman also took the witness stand and identified numerous documents consisting of Purchase Orders, Bills of
Lading, Delivery Receipts, and other evidences of the purchase of a barge and other goods by the petitioner from
Allied Overseas Commercial Co., Ltd. Hueng Huan Yuen Sabio, Assistant to the General Manager and in-charge of
shipping of Allied Overseas Commercial Co., Ltd., further testified to the same transactions.
We have no doubt from the records that the obligation actually existed.
Anent petitioner's second point, we find no merit in his contention that there was subrogation instead of an
assignment of credit.
The basis of the complaint is not a deed of subrogation but an assignment of credit whereby the private respondent
became the owner, not the subrogee of the credit since the assignment was supported by HK$ 1.00 and other
valuable considerations.
The case is one of the assignment of credit and not subrogation. In subrogation, the third party pays the obligation of
the debtor to the creditor with the latter's consent. As a consequence, the paying third party steps into the shoes of
the original creditor as subrogee of the latter.
An assignment of credit, on the other hand, is the process of transferring the right of the assignor to the assignee who
would then have the right to proceed against the debtor. The assignment may be done either gratuitously or
onerously, in which case, the assignment has an effect similar to that of a sale (p. 235, Civil Code of the Philippines,
Annotated, Vol. V, Paras, 1982 ed.; Nyco Sales Corp. vs. BA Finance Corp., G.R. No. 71694, August 16, 1991).
The petitioner further contends that the consent of the debtor is essential to the subrogation. Since there was no
consent on his part, then he allegedly is not bound.
Again, we find for the respondent. The questioned deed of assignment is neither one of the subrogation nor a power
of attorney as the petitioner alleges. The deed of assignment clearly states that the private respondent became an
assignee and, therefore, he became the only party entitled to collect the indebtedness. As a result of the Deed of
Assignment, the plaintiff acquired all rights of the assignor including the right to sue in his own name as the legal

13
assignee. Moreover, in assignment, the debtor's consent is not essential for the validity of the assignment (Art. 1624
in relation to Art. 1475, Civil Code), his knowledge thereof affecting only the validity of the payment he might make
(Article 1626, Civil Code).
Article 1626 also shows that payment of an obligation which is already existing does not depend on the consent of the
debtor. It, in effect, mandates that such payment of the existing obligation shall already be made to the new creditor
from the time the debtor acquires knowledge of the assignment of the obligation.
The law is clear that the debtor had the obligation to pay and should have paid from the date of notice whether or not
he consented.
We have ruled in Sison & Sison v. Yap Tico and Avancea, 37 Phil. 587 [1918] that definitely, consent is not
necessary in order that assignment may fully produce legal effects. Hence, the duty to pay does not depend on the
consent of the debtor. Otherwise, all creditors would be prevented from assigning their credits because of the
possibility of the debtors' refusal to give consent.
What the law requires in an assignment of credit is not the consent of the debtor but merely notice to him. A creditor
may, therefore, validly assign his credit and its accessories without the debtor's consent (National Investment and
Development Co. v. De los Angeles, 40 SCRA 489 [1971]). The purpose of the notice is only to inform the debtor that
from the date of the assignment, payment should be made to the assignee and not to the original creditor.
The fact that the deed of assignment empowered the assignee to collect the credit originally owing to the foreign
corporation does not make the assignee a mere attorney-in-fact.
The case of Ngo Tian Tian Tek and Ngo Hay v. Philippine Education Co., 78 Phil. 271 [1947] is in point:
When a chose, capable of legal assignment is assigned absolutely to one, but the assignment is
made for purpose of collection, the legal title thereto vests, in the assignee, and it is no concern of the
debtor that the equitable title is in another and payment to the assignee discharges the debtor.
The petitioner further assails the consideration given for the deed of assignment which is stated as "HK$ 1.00 and
other valuable considerations."
A valuable considerations, however small or nominal if given or stipulated in good faith is, in the absence of fraud,
sufficient. A stipulation in consideration of $1 is just as effectual and valuable a consideration as a larger sum
stipulated for or paid (Penaco v. Ruaya, 110 SCRA 46 [1981]; Ascalon vs. Court of Appeals, 158 SCRA 542, [1988]). It
is not clear what considerations led to the assignment but they must have been sufficiently valuable to the assignor in
view of the amount involved.
Hence, by virtue of the deed of assignment whose existence and legality remains unrebutted, the respondent
acquired all the rights of the assignor including the right to sue in his own name as the legal assignee. The contract
was not executed merely to enable the foreign corporation to sue in the Philippines because even without the
assignment, the foreign corporation can also sue in the Philippines for isolated transactions even if not licensed to
engage in business in this country.
Lastly, the petitioner asserts that the award of damages was excessive there being no finding to justify the amounts.
We find the amounts equitable except for the award of P500,000.00 as actual damages in addition to the
P450,553.00 indebtedness. The records do not contain the factual basis for such an award. Thus, we agree with the
petitioner that it is not justifiable to award that amount.
All premises considered, we find for the private respondent. We should also add that the case has dragged on 21
years since its filing with the then Court of First Instance of Pasig, Rizal on February 4, 1971, due to the numerous
dilatory tactics of the petitioner. The delay has obviously created an injustice on the part of private respondent not fully
compensated by the payment of interests.
Furthermore, it is well-settled that the jurisdiction of the Supreme Court is confined to a review of questions of law,
except where the findings of facts of the appellate court are not supported by the record or are so glaringly erroneous
as to constitute a serious abuse of discretion. (Caete v. Court of Appeals, 171 SCRA 13 [1989]).
The findings of the fact of the trial court being adequately supported by documentary as well as testimonial evidence
and affirmed by the Court of Appeals, are conclusive on the Supreme Court unless they fall within a few well-defined
exceptions. No such exception is shown in this case.

14
ACCORDINGLY, the petition is hereby DISMISSED. The decision of the Court of Appeals dated October 22, 1987 and
its resolution dated June 16, 1988 are AFFIRMED with the modification that the award of additional actual damages in
the amount of P500,000.00 is deleted.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-36413 September 26, 1988
MALAYAN INSURANCE CO., INC., petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL,
INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.
PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February
1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U2021 of the Court of First Instance of Pangasinan.
The antecedent facts of the case are as follows:
On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy
Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a
Willys jeep with Motor No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance
coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in
the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon
Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc.
(PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the
insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in
the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the
PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He
prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as
reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and
compensatory damages; and P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped
the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep;
and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and
supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and
all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff,
claiming that the fault in the accident was solely imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the herein petitioner wherein he alleged
that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other
expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a
private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured,
for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the
effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained
of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to
pay.

15
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon
Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an
employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an
employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P.
Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner
prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by
the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it
may be ordered to pay the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff and
against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;
(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With
respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should be
made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved. 1
On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice
Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff
Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the
petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice
Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2
Hence, the present recourse by petitioner insurance company.
The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon
Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages,
petitioner may be ordered to pay jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability
of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the
Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos
against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to
reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the
P20,000.00 it has been adjudged to pay respondent Vallejos." 3
However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important
to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of
respondents Sio Choy and San Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of
Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to
respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for
whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy.
As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and
respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice
Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to
Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep,
pursuant to Article 2184 of the Civil Code which provides:

16
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle,
could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was
negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next
preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the
former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the
Civil Code which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for
those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and household helpers acting within the scope
of their assigned tasks, even though the former are not engaged ill any business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all
the diligence of a good father of a family to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily
liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasidelict is solidarily. 4
On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is
adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the
insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy
existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident.
In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another
passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the
driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney
against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at
fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's
fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied
as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in
said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company,
who were held solidarily liable to the heirs of the victim.
While it is true that where the insurance contract provides for indemnity against liability to third persons, such third
persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against
third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties
found at fault. The liability of the insurer is based on contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held
by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San
Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the
indemnity contract against third party liability-under which an insurer can be directly sued by a third party this will
result in a violation of the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other
hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against
loss, damage, or liability arising from an unknown or contingent event." 8
In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc.
solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is
only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to
pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can
petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with respondent Sio
Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of
the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay
P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial

17
court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and
San Leon Rice Mill, Inc. to respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not
entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the
contract of insurance existing between petitioner and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts. Thus
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477).
Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured
may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing
Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after
reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs.
Cincinnati Ins. Co., 22 Ohio St. 382).
Although many policies including policies in the standard form, now provide for subrogation, and thus determine the
rights of the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the
insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746).
Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment
to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not
dependent upon , nor does it grow out of any privity of contract (emphasis supplied) or upon written assignment of
claim, and payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and
Heating Co., 264 N.C. 456, 142 SE 2d 18). 9
It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall
become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter
has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid
the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors
offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest
for the payment already made. If the payment is made before the debt is due, no interest for the intervening period
may be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee
of solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the
respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of
said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and
petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be
entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of
P14,551.50 (which is 1/2 of P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is
hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
THIRD DIVISION
G.R. No. 159831 October 14, 2005

18
PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,
vs.
JOHN BORDMAN LTD. OF ILOILO, INC., Respondent.
DECISION
Deeply imbedded in our jurisprudence is the doctrine that the factual findings of the Court of Appeals (CA) affirming
those of the trial court are, subject to some exceptions, binding upon this Court. Otherwise stated, only questions of
law, not of facts, may be raised before this Court in petitions for review under Rule 45 of the Rules of Court.
Nonetheless, in the interest of substantial justice, the Court delved into both the factual and the legal issues raised in
the present case and found no reason to overturn the CAs main Decision. Furthermore, under the peculiar factual
circumstances of the instant appeal, this Court holds that the period for reckoning the prescription of the present
cause of action began only when respondent discovered with certainty the short deliveries made by petitioner.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the August 20, 2002 Decision 2and
August 29, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 46974. The challenged Decision
disposed as follows:
"WHEREFORE, premises considered, the assailed decision dated August 30, 1991 of the RTC, Branch 26, Manila in
Civil Case No. 13419 is hereby AFFIRMED with the MODIFICATION that the award of exemplary damages and
attorneys fees be both reduced to P100,000.00.
"The order dated December 9, 1991 is likewise AFFIRMED."4
The assailed Resolution denied reconsideration.
The Facts
Petitioner Pilipinas Shell Petroleum Corporation ("Pilipinas Shell") is a corporation engaged in the business of refining
and processing petroleum products.5 The invoicing of the products was made by Pilipinas Shell, but delivery was
effected through Arabay, Inc., its sole distributor at the time material to the present case. 6 From 1955 to 1975,
Respondent John Bordman Ltd. of Iloilo, Inc. ("John Bordman") purchased bunker oil in drums from Arabay.7 When
Arabay ceased its operations in 1975, Pilipinas Shell took over and directly marketed its products to John Bordman. 8
On August 20, 1980, John Bordman filed against Pilipinas Shell a civil case for specific performance. The former
demanded the latters short deliveries of fuel oil since 1955; as well as the payment of exemplary damages, attorneys
fees and costs of suit.9 John Bordman alleged that Pilipinas Shell and Arabay had billed it at 210 liters per drum, while
other oil companies operating in Bacolod had
billed their customers at 200 liters per drum. On July 24, 1974, when representatives from John Bordman and Arabay
conducted a volumetric test to determine the quantity of fuel oil actually delivered, the drum used could only fill up to
190 liters, instead of 210 liters, or a short delivery rate of 9.5%. 10 After this volumetric test, Arabay reduced its billing
rate to 200 (instead of 210) liters per drum, except for 4 deliveries between August 1 and September 9, 1974, when
the billing was at 190 liters per drum. 11
On January 23, 1975, another volumetric test allegedly showed that the drum could contain only 187.5 liters. 12 On
February 1, 1975, John Bordman requested from Pilipinas Shell that 640,000 liters of fuel oil, representing the latters
alleged deficient deliveries, be credited to the formers account. 13 The volume demanded was adjusted to 780,000
liters, upon a realization that the billing rate of 210 liters per drum had been effective since 1966.
On October 24, 1977 and November 9, 1977, representatives from John Bordman, the auditor of the Iloilo City
Commission on Audit, pump boat carriers, and truck drivers conducted actual measurements of fuel loaded on tanker
trucks as transferred to dented drums at mouth full. They found that the drums could contain 180 liters only.14 In its
Complaint, John Bordman prayed for the appointment of commissioners to ascertain the volume of short deliveries. 15
On October 21, 1980, Pilipinas Shell and Arabay filed their Answer with Counterclaim. 16 They specifically denied that
fuel oil deliveries had been less than those billed. 17 Moreover, the drums used in the volumetric tests were allegedly
not representative of the ones used in the actual deliveries. 18
By way of affirmative defense, Pilipinas Shell and Arabay countered that John Bordman had no cause of action
against them.19 If any existed, it had been waived or extinguished; or otherwise barred by prescription, laches, and
estoppel.20
During the pretrial, the parties agreed to limit the issues to the following: (1) whether the action had prescribed, and
(2) whether there had been short deliveries in the quantities of fuel oil. 21 John Bordmans Motion for Trial by

19
Commissioner was granted by the RTC,22 and the court-appointed commissioner submitted her Report on April 20,
1988.23
On April 3, 1989, Pilipinas Shell and Arabay filed a Motion for Resolution of their affirmative defense of
prescription.24 Because prescription had not been established with certainty, the RTC ordered them on November 6,
1989, to present evidence in support of their defense. 25
On August 30, 1991, the RTC issued a Decision in favor of respondent. 26 Pilipinas Shell and Arabay were required to
deliver to John Bordman 916,487.62 liters of bunker fuel oil, to pay actual damages of P1,000,000; exemplary
damages of P500,000; attorneys fees of P500,000; and the costs of suit.27 The basis of the trial courts decision was
predicated on the following pronouncement:
"Since [respondent] had fully paid their contract price at 210 liters per drum, then the [petitioner] should deliver to the
[respondent] the undelivered volume of fuel oil from 1955 to 1974, which is 20 liters per drum; and 10 liters per drum
from 1974 to 1977. Per the invoice receipts submitted, the total volume of fuel oil which [petitioner] have failed to
deliver to [respondent] is 916,487.62 liters."28
Pilipinas Shell appealed to the CA, alleging that John Bordman had failed to prove the short deliveries; and that the
suit had been barred by estoppel, laches, and prescription. 29
Ruling of the Court of Appeals
Upholding the trial court, the CA overruled petitioners objections to the evidence of respondent in relation to the
testimonies of the latters witnesses and the results of the volumetric tests. 30 The CA noted that deliveries from 1955
to 1977 had been admitted by petitioner; and the fact of deficiency, established by respondent. 31
The appellate court also debunked petitioners claims of estoppel and laches. It held that the stipulation in the product
invoices stating that respondent had received the products in good order was not controlling. 32 On the issue of
prescription, the CA ruled that the action had been filed within the period required by law.33
Hence, this Petition.34
The Issues
Petitioner states the issues in this wise:
"I.
Respondents allegation that the Petition must be summarily dismissed for containing a false, defective and
unauthorized verification and certification against forum shopping is patently unmeritorious, as the requisites for a
valid verification and certification against forum shopping have been complied with.
"II.
The Decisions of the court a quo and of the Honorable Court of Appeals were clearly issued with grave abuse of
discretion, based as they are on an unmistakable misappreciation of facts clearly appearing in the records of the
case.
A.
The Honorable Court of Appeals erred giving full faith and credence to the testimony of respondents sole witness,
who was neither an expert witness nor one with personal knowledge of the material facts.
B.
The Honorable Court of Appeals erred in ruling that the testimony of respondents sole witness was not controverted
and that the results of his volumetric tests were not disproved by petitioner as the records of the court a
quo indubitably show that petitioner disputed the testimony of said witness in every material respect.
C.
The court a quo and the Honorable Court of Appeals erred when it failed to hold that the results of the volumetric tests
conducted by respondents sole witness are not worthy of full faith and credence, considering that drums subjected to
said tests in 1974 and 1975 were not the same with, or otherwise similar to those used by petitioner in the deliveries
made to respondent since 1955.

20
D.
The Honorable Court of Appeals erred in holding that petitioners unilateral reduction of billing rates constitutes an
implied admission of the fact of short deliveries. The reduction was made for no other purpose than as a business
accommodation of a valued client.
"III.
The court a quo, as well as the Honorable Court of Appeals, gravely erred in not ruling that respondents claims of
alleged short deliveries for the period 1955 to 1976 were already barred by prescription.
"IV.
The Honorable Court of Appeals and the court a quo erred in not ruling that respondents claims are barred by
estoppel and laches considering that respondent failed to assert its claim for about twenty-five (25) years.
"V.
The Honorable Court of Appeals erred in awarding to respondent compensatory damages, exemplary damages,
attorneys fees and cost of suit, when petitioner has not otherwise acted in a wanton, fraudulent, reckless, oppressive
or malevolent manner."35
The Courts Ruling
In the main, the Petition has no merit, except in regard to the CAs grant of exemplary damages.
First Issue:
Validity of Verification and Certification
Preliminarily, the Court shall tackle respondents allegation that petitioners verification and certification against forum
shopping had not complied with, and were in fact made in contravention of, Section 4 of Rule 45 of the Rules of
Court.36 Respondent alleges that Romeo B. Garcia, vice-president of Pilipinas Shell, had no authority to execute
them.37
The records, however, show that petitioners president conferred upon its vice-president the power to institute actions.
As certified by the assistant board secretary, the delegation was authorized by petitioners board of directors. 38 The
power to institute actions necessarily included the power to execute the verification and certification against forum
shopping, as required in a petition for review before this Court.
In any event, the policy of liberal interpretation of procedural rules compels us to give due course to the
Petition.39There appears to be no intention to circumvent the need for proper verification and certification, which are
intended to assure the truthfulness and correctness of the allegations in the Petition and to discourage forum
shopping.40
Second Issue:
Appreciation of Facts
As a general rule, questions of fact may not be raised in a petition for review.41 The factual findings of the trial court,
especially when affirmed by the appellate court, are binding and conclusive on the Supreme Court. 42Nevertheless,
this rule has certain exceptions,43 which petitioner asserts are present in this case.44 The Court reviewed the evidence
presented and revisited the applicable pertinent rules. Being intertwined, the issues raised by petitioner relating to the
evidence will be discussed together.
Objection to Respondents Witness
Petitioner claims that the trial court erred in giving credence to the testimony of respondents witness, Engineer Jose
A. Macarubbo. The testimony had allegedly consisted of his personal opinion. Under the Rules of Evidence, the
opinion of a witness is not admissible, unless it is given by an expert. 45 Macarubbo was allegedly not an expert
witness; neither did he have personal knowledge of material facts.46
We clarify. Macarubbo testified that sometime in May 1974, respondent had contacted him to review the reception of
fuel at its lime plant. He discovered that Arabay had been billing respondent at 210 liters per drum, while other oil
companies billed their customers at 200 liters per drum. 47 On July 24, 1974, he and Jerome Juarez, branch manager

21
of Pilipinas Shell, conducted a volumetric test to determine the amount of fuel that was actually being delivered to
respondent.48 On January 25, 1975, the test was again conducted in the presence of Macarubbo, Juarez and Manuel
Ravina (Arabays sales supervisor).49
From the foregoing facts, it is evident that Macarubbo did not testify as an expert witness. The CA correctly noted that
he had testified based on his personal knowledge and involvement in discovering the short deliveries. 50 His testimony
as an ordinary witness was aptly allowed by the appellate court under the following rule on admissibility:
"Sec. 36. Testimony generally confined to personal knowledge; hearsay excluded. A witness can testify only to
those facts which he knows of his personal knowledge; that is, which are derived from his own perception, except as
otherwise provided in these rules."51
Challenge to Volumetric Tests
Petitioner disputes the CAs finding that it had failed to disprove the results of the volumetric tests conducted by
respondent. The former claims that it was able to controvert the latters evidence. 52
During the July 24, 1974 volumetric test, representatives of both petitioner and respondent allegedly agreed to
conduct two tests using drums independently chosen by each. 53 Respondent allegedly chose the worst-dented drum
that could fill only up to 190 liters. The second drum, which was chosen by petitioner, was not tested in the presence
of Macarubbo because of heavy rain. 54 It supposedly filled up to 210 liters, however.55
The issue, therefore, relates not to the submission of evidence, but to its weight and credibility. While petitioner may
have submitted evidence, it failed to disprove the short deliveries. The lower courts obviously gave credence to the
volumetric tests witnessed by both parties as opposed to those done solely by petitioner.
Petitioner also challenges the reliability of the volumetric tests on the grounds of failure to simulate the position of the
drums during filling56 and the fact that those tested were not representative of the ones used from 1955 to
1974.57 These contentions fail to overturn the short deliveries established by respondent.
The evidence of petitioner challenging the volumetric tests was wanting. It did not present any as regards the correct
position of the drums during loading. Notably, its representative had witnessed the two tests showing the short
deliveries.58 He therefore had the opportunity to correct the position of the drums, if indeed they had been incorrectly
positioned. Further, there was no proof that those used in previous years were all good drums with no defects. Neither
was there evidence that its deliveries from 1955 had been properly measured.
From the foregoing observations, it is apparent that the evidence presented by both parties preponderates in favor of
respondent. The Court agrees with the following observations of the CA:
"[Petitioner] posits that its fuel deliveries were properly measured and/or calibrated. To the mind of this Court,
regardless of what method or manner the deliveries were made, whether pre-packed drums, by the dip stick method
or through ex-jetty, the fact remains that [petitioner] failed to overcome the burden of proving that indeed the drums
used during the deliveries contain 210 liters. The [petitioner], to support its claim, adduced no evidence. Moreover, it
failed to disprove the results of the volumetric tests."59
Having sustained the finding of short deliveries, the Court finds it no longer necessary to address the contention of
petitioner that its subsequent reduction of billings constituted merely a business accommodation. 60
Third Issue:
Prescription
Action Based on Contract
Petitioner avers that respondents action -- a claim for damages as a result of over-billing -- has already prescribed.
Respondents claim supposedly constitutes a quasi-delict, which prescribes in four years. 61
We do not agree. It is elementary that a quasi-delict, as a source of an obligation, occurs only when there is no
preexisting contractual relation between the parties. 62 The action of respondent
for specific performance was founded on short deliveries, which had arisen from its Contract of Sale with petitioner,
and from which resulted the formers obligation in the present case. Any action to enforce a breach of that Contract
prescribes in ten years.63
Prescriptive Period Counted from
the Accrual of the Cause of Action

22
Petitioner avers that the action of respondent, even if based on a Contract, has nevertheless already prescribed,
because more than ten years had lapsed since 1955 to August 20, 1970 -- the period of short deliveries that the latter
seeks to recover.64 Respondents request for fuel adjustments on October 24, 1974, February 1, 1975, April 3, 1975,
and September 22, 1975, were not formal demands that would interrupt the prescriptive period, says petitioner.
The Court shall first address the contention that formal demands were not alleged in the Complaint. This argument
was not raised in the courts a quo; thus, it cannot be brought before this tribunal. 65 Well settled is the rule that issues
not argued in the lower courts cannot be raised for the first time on appeal. 66 At any rate, it appears from the records
that respondents letters to petitioner dated October 24, 1974 and February 1, 1975 were formal and written
extrajudicial demands that interrupted the prescriptive period. 67 Nevertheless, the interruption has no bearing on the
prescriptive period, as will be shown presently.
Cause of Action Defined
Actions based upon a written contract should be brought within ten years from the time the right of action
accrues.68 This accrual refers to the cause of action, which is defined as the act or the omission by which a party
violates the right of another.69
Jurisprudence is replete with the elements of a cause of action: (1) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created; (2) an obligation on the part of the named defendant to respect or not
to violate the right; and (3) an act or omission on the part of the defendant violative of the right of the plaintiff or
constituting a breach of an obligation to the latter.70 It is only when the last element occurs that a cause of action
arises.71
Applying the foregoing elements, it can readily be determined that a cause of action in a contract arises upon its
breach or violation.72 Therefore, the period of prescription commences, not from the date of the execution of the
contract, but from the occurrence of the breach.
The cause of action resulting from a breach of contract is dependent on the facts of each particular case. The
following cases involving prescription illustrate this statement.
Nabus v. Court of Appeals73 dealt with an action to rescind a Contract of Sale. The cause of action arose at the time
when the last installment was not paid. Since the case was filed ten years after that date, the action was deemed to
have prescribed.74
In Elido v. Court of Appeals,75 the overdraft Agreement stipulated that the obligation was payable on demand. Thus,
the breach started only when that judicial demand was made. This rule was applied recently to China Banking
Corporation v. Court of Appeals,76 which held that the prescriptive period commenced on the date of the demand, not
on the maturity of the certificate of indebtedness. In that case, the certificate had stipulated that payment should be
made upon presentation.
Banco Filipino Savings & Mortgage Bank v. Court of Appeals 77 involved a Contract of Loan with real estate
mortgages, whereby the creditor could unilaterally increase the interest rate. When the debtor failed to pay the loan,
the creditor foreclosed on the mortgage. The Court ruled that the cause of action for the annulment of the foreclosure
sale should be counted from the date the debtor discovered the increased interest rate.78
In Cole v. Gregorio,79 the agreement to buy and sell was conditioned upon the conduct of a preliminary survey of the
land to verify whether it contained the area stated in the Tax Declaration. Both the agreement and the survey were
made in 1963. The Court ruled that the right of action for specific performance arose only in 1966, when the plaintiff
discovered the completion of the survey.80
Serrano v. Court of Appeals81dealt with money claims arising from a Contract of Employment, which would prescribe
in three years from the time the cause of action accrued. 82 The Court noted that the cause of action had arisen when
the employer made a definite denial of the employees claim. It was deemed that the issues had not yet been joined
prior to the definite denial of the claim, because the employee could have still been reinstated. 83
Naga Telephone Co. v. Court of Appeals84 involved the reformation of a Contract. Among others, the grounds for the
action filed by the plaintiff included allegations that the contract was too one-sided in favor of the defendant, and that
certain events had made the arrangement inequitable. 85 The Court ruled that the cause of action for a reformation
would arise only when the contract appeared disadvantageous. 86
Cause of Action in
the Present Case

23
The Court of Appeals noted that, in the case before us, respondent had been negotiating with petitioner since 1974.
Accordingly, the CA ruled that the cause of action had arisen only in 1979, after a manifestation of petitioners denial
of the claims.87
The nature of the product in the present factual milieu is a major factor in determining when the cause of action has
accrued. The delivery of fuel oil requires the buyers dependence upon the seller
for the correctness of the volume. When fuel is delivered in drums, a buyer readily assumes that the agreed
volume can be, and actually is, contained in those drums.
Buyer dependence is common in many ordinary sale transactions, as when gasoline is loaded in the gas tanks of
motor vehicles, and when beverage is purchased in bottles and ice cream in bulk containers. In these cases, the
buyers rely, to a considerable degree, on the sellers representation that the agreed volumes are being delivered.
They are no longer expected to make a meticulous measurement of each and every delivery.
To the mind of this Court, the cause of action in the present case arose on July 24, 1974, when
respondentdiscovered the short deliveries with certainty. Prior to the discovery, the latter had no indication that it was
not getting what it was paying for. There was yet no issue to speak of; thus, it could not have brought an action
against petitioner. It was only after the discovery of the short deliveries that respondent got into a position to bring an
action for specific performance. Evidently then, that action was brought within the prescriptive period when it was filed
on August 20, 1980.
Fourth Issue:
Estoppel
Petitioner alleges, in addition to prescription, that respondent is estopped from claiming short deliveries. 88 It is argued
that, since the initial deliveries had been made way back in 1955, the latter belatedly asserted its right only in 1980, or
after twenty-five years. Moreover, respondent should allegedly be bound by the Certification in the delivery Receipts
and Invoices that state as follows:
"RECEIVED ABOVE PRODUCT(S) IN GOOD CONDITION. I HAVE INSPECTED THE COMPARTMENTS OF THE
BULK LORRY, WHEN FULL AND EMPTY, AND FOUND THEM IN ORDER."89
Estoppel by Laches
Estoppel by laches is the failure or neglect for an unreasonable length of time to do that which, by the exercise of due
diligence, could or should have been done earlier.90 Otherwise stated, negligence or omission to assert a right within a
reasonable time warrants a presumption that the party has abandoned or declined the right. 91 This principle is based
on grounds of public policy, which discourages stale claims for the peace of society.92
Respondent cannot be held guilty of delay in asserting its right during the time it did not yet know of the short
deliveries. The facts in the present case show that after the discovery of the short deliveries, it immediately sought to
recover the undelivered fuel from petitioner.93 Laches refers, inter alia, to the length of time in asserting a claim. The
Court, therefore, agrees with the lower courts that respondents claim was not lost by laches.
Alleged Certification Not a Bar
It is not disputed that the alleged Certification stating that respondent received the fuel oil in good condition is in the
nature of a contract of adhesion. 94 The statement was in fine print at the lower right of petitioners invoices. 95It was
made in the form and language prepared by petitioner. The latters customers, including respondent, were required to
sign the statement upon every delivery. The primary purpose of an invoice, however, is merely to evidence delivery
and receipt of the goods stated in it.
While the Court has sustained the validity of similar stipulations in other contracts, it has also recognized that reliance
on them cannot be favored when the facts and circumstances warrant the contrary.96 Noting the nature of the product
in the present factual milieu, as discussed earlier in the claim of prescription, the dependence of the buyer upon the
seller makes the stipulation inapplicable.
Indeed, it would be too cumbersome and impractical for respondent to measure the fuel oil in each and every drum
delivered. Nonetheless, upon delivery by petitioner, the former was obliged to sign the Certification in the invoice. In
signing it, respondent could not have waived the right to a legitimate claim for hidden defects. Thus, it is not estopped
from recovering short deliveries.
Doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared
them. This principle especially holds true with regard to waivers, which are not presumed, but which must be clearly
and convincingly shown.97

24
Fourth Issue:
Exemplary Damages and Attorneys Fees
In the last error assigned, petitioner challenges the Order for specific performance and the awards of exemplary
damages and attorneys fees in favor of respondent. 98 The directive for the delivery of 916,487.62 liters of bunker oil
will no longer be taken up because, as discussed earlier, this fact is borne out by the evidence.
The CA sustained the award of exemplary damages because of petitioners wanton refusal to deliver the shortages of
fuel oil after the demand was made.99 Similarly, attorneys fees were imposed, because respondent had been
compelled to litigate to protect its interests.100 Both awards, however, were each reduced fromP500,000
to P100,000.101
Exemplary Damages Not Proper
Exemplary damages are imposed as a corrective measure102 when the guilty party has acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner.103 These damages are awarded in accordance with the sound discretion
of the court.104
Petitioner argues that its refusal to deliver the shortages of fuel was premised on good faith. 105 Indeed, records reveal
that it had reviewed respondents requests for the delivery of shortages before declining them. 106 It likewise readily
granted respondents requests to conduct volumetric tests. It simply had the mistaken belief that it was not liable for
any shortages. Unfortunately, the evidence showed the contrary.
Absent any showing of bad faith on the part of petitioner, exemplary damages cannot be imposed upon it.
Attorneys Fees Allowed
Petitioner claims that the award of attorneys fees was tied up with the award for exemplary damages. 107 Since those
damages were not recoverable, then the attorneys fees allegedly had no legal basis.
While attorneys fees are recoverable when exemplary damages are awarded, the former may also be granted when
the court deems it just and equitable. 108 The grant of attorneys fees depends on the circumstances of each case and
lies within the discretion of the court. They may be awarded when a party is compelled to litigate or to incur expenses
to protect its interest by reason of an unjustified act by the other.109
The Court agrees that the award of P100,000 as attorneys fees is very reasonable;110 in fact, it is almost symbolic, as
it will not totally recompense respondent for the actual fees spent to prosecute its cause. The case has dragged on
unnecessarily despite petitioners failure to present countervailing evidence during the trial. Moreover, respondent
was compelled to litigate, notwithstanding its attempt at an amicable settlement from the time it discovered the
shortages in 1974 until the actual filing of the case in 1980. 111
WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution are AFFIRMED with the
slightMODIFICATION that the award of exemplary damages is deleted. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents.
VITUG, J.:

25
Assailed, in this petition for review, is the decision of the Court of Appeals, dated 04 December 1991, in CA-G.R. SP
No. 26345 setting aside and declaring without force and effect the orders of execution of the trial court, dated 30
August 1991 and 27 September 1991, in Civil Case No. 87-41058.
The antecedents are recited in good detail by the appellate court thusly:
On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu Asuncion and Keh
Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court, Branch 31,
Manila in Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or lessees of residential and
commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street, Binondo, Manila; that they have
occupied said spaces since 1935 and have been religiously paying the rental and complying with all the conditions of
the lease contract; that on several occasions before October 9, 1986, defendants informed plaintiffs that they are
offering to sell the premises and are giving them priority to acquire the same; that during the negotiations, Bobby Cu
Unjieng offered a price of P6-million while plaintiffs made a counter offer of P5-million; that plaintiffs thereafter asked
the defendants to put their offer in writing to which request defendants acceded; that in reply to defendant's letter,
plaintiffs wrote them on October 24, 1986 asking that they specify the terms and conditions of the offer to sell; that
when plaintiffs did not receive any reply, they sent another letter dated January 28, 1987 with the same request; that
since defendants failed to specify the terms and conditions of the offer to sell and because of information received
that defendants were about to sell the property, plaintiffs were compelled to file the complaint to compel defendants to
sell the property to them.
Defendants filed their answer denying the material allegations of the complaint and interposing a special defense of
lack of cause of action.
After the issues were joined, defendants filed a motion for summary judgment which was granted by the lower court.
The trial court found that defendants' offer to sell was never accepted by the plaintiffs for the reason that the parties
did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of sale at all.
Nonetheless, the lower court ruled that should the defendants subsequently offer their property for sale at a price of
P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of the decision states:
WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiffs summarily
dismissing the complaint subject to the aforementioned condition that if the defendants subsequently decide to offer
their property for sale for a purchase price of Eleven Million Pesos or lower, then the plaintiffs has the option to
purchase the property or of first refusal, otherwise, defendants need not offer the property to the plaintiffs if the
purchase price is higher than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. In a decision promulgated on September 21, 1990 (penned by Justice Segundino G. Chua
and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago), this Court affirmed with modification the
lower court's judgment, holding:
In resume, there was no meeting of the minds between the parties concerning the sale of the property. Absent such
requirement, the claim for specific performance will not lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable ground for its award. Summary judgment for defendants was
properly granted. Courts may render summary judgment when there is no genuine issue as to any material fact and
the moving party is entitled to a judgment as a matter of law (Garcia vs. Court of Appeals, 176 SCRA 815). All
requisites obtaining, the decision of the court a quo is legally justifiable.
WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is hereby AFFIRMED, but subject to
the following modification: The court a quo in the aforestated decision gave the plaintiffs-appellants the right of first
refusal only if the property is sold for a purchase price of Eleven Million pesos or lower; however, considering the
mercurial and uncertain forces in our market economy today. We find no reason not to grant the same right of first
refusal to herein appellants in the event that the subject property is sold for a price in excess of Eleven Million pesos.
No pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme Court by petition for review on certiorari. The Supreme Court
denied the appeal on May 6, 1991 "for insufficiency in form and substances" (Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court, the Cu Unjieng
spouses executed a Deed of Sale (Annex D, Petition) transferring the property in question to herein petitioner Buen
Realty and Development Corporation, subject to the following terms and conditions:

26
1. That for and in consideration of the sum of FIFTEEN MILLION PESOS (P15,000,000.00), receipt of which in full is
hereby acknowledged, the VENDORS hereby sells, transfers and conveys for and in favor of the VENDEE, his heirs,
executors, administrators or assigns, the above-described property with all the improvements found therein including
all the rights and interest in the said property free from all liens and encumbrances of whatever nature, except the
pending ejectment proceeding;
2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for the transfer of title in his favor and
other expenses incidental to the sale of above-described property including capital gains tax and accrued real estate
taxes.
As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses was cancelled and, in
lieu thereof, TCT No. 195816 was issued in the name of petitioner on December 3, 1990.
On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees demanding that the
latter vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the property subject to the
notice of lis pendens regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T-881 in the name of the Cu
Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No. 87-41058 as
modified by the Court of Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:
Presented before the Court is a Motion for Execution filed by plaintiff represented by Atty. Antonio Albano. Both
defendants Bobby Cu Unjieng and Rose Cu Unjieng represented by Atty. Vicente Sison and Atty. Anacleto Magno
respectively were duly notified in today's consideration of the motion as evidenced by the rubber stamp and
signatures upon the copy of the Motion for Execution.
The gist of the motion is that the Decision of the Court dated September 21, 1990 as modified by the Court of Appeals
in its decision in CA G.R. CV-21123, and elevated to the Supreme Court upon the petition for review and that the
same was denied by the highest tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there was an Entry of Judgment by the Supreme
Court as of June 6, 1991, stating that the aforesaid modified decision had already become final and executory.
It is the observation of the Court that this property in dispute was the subject of theNotice of Lis Pendens and that the
modified decision of this Court promulgated by the Court of Appeals which had become final to the effect that should
the defendants decide to offer the property for sale for a price of P11 Million or lower, and considering the mercurial
and uncertain forces in our market economy today, the same right of first refusal to herein plaintiffs/appellants in the
event that the subject property is sold for a price in excess of Eleven Million pesos or more.
WHEREFORE, defendants are hereby ordered to execute the necessary Deed of Sale of the property in litigation in
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for the consideration of P15 Million pesos in recognition
of plaintiffs' right of first refusal and that a new Transfer Certificate of Title be issued in favor of the buyer.
All previous transactions involving the same property notwithstanding the issuance of another title to Buen Realty
Corporation, is hereby set aside as having been executed in bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another order, the dispositive portion of which reads:
WHEREFORE, let there be Writ of Execution issue in the above-entitled case directing the Deputy Sheriff Ramon
Enriquez of this Court to implement said Writ of Execution ordering the defendants among others to comply with the
aforesaid Order of this Court within a period of one (1) week from receipt of this Order and for defendants to execute
the necessary Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur
Go for the consideration of P15,000,000.00 and ordering the Register of Deeds of the City of Manila, to cancel and
set aside the title already issued in favor of Buen Realty Corporation which was previously executed between the
latter and defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition) was issued. 1

27
On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without
force and effect the above questioned orders of the court a quo.
In this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of execution
by virtue of the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen Realty, at the time
of the latter's purchase of the property on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is the adoption of such arrangements as the right of first
refusal, a purchase option and a contract to sell. For ready reference, we might point out some fundamental precepts
that may find some relevance to this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted
upon the concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient
cause established by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b)
the object which is the prestation or conduct; required to be observed (to give, to do or not to do); and (c) the subjectpersons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor)
subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305,
Civil Code). A contract undergoes various stages that include its negotiation or preparation, its perfection and, finally,
its consummation. Negotiation covers the period from the time the prospective contracting parties indicate interest in
the contract to the time the contract is concluded (perfected). The perfection of the contract takes place upon the
concurrence of the essential elements thereof. A contract which is consensual as to perfection is so established upon
a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. A
contract which requires, in addition to the above, the delivery of the object of the agreement, as in a pledge
or commodatum, is commonly referred to as a real contract. In a solemn contract, compliance with certain formalities
prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed
form being thereby an essential element thereof. The stage of consummationbegins when the parties perform their
respective undertakings under the contract culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation.
In sales, particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when
a person, called the seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right
to another, called the buyer, over which the latter agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to
deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the
thing sold is retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase
price), the breach of the condition will prevent the obligation to convey title from acquiring an obligatory
force. 2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that, although denominated a "Deed of
Conditional Sale," a sale is still absolute where the contract is devoid of any proviso that title is reserved or the right to
unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the buyer
upon actual or constructive delivery (e.g., by the execution of a public document) of the property sold. Where the
condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such
perfection. 3 If the condition is imposed on the obligation of a party which is not fulfilled, the other party may either
waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4
An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can
be obligatory on the parties, and compliance therewith may accordingly be exacted. 5
An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a
valuable consideration distinct and separate from the price, is what may properly be termed a perfected contract
ofoption. This contract is legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if
the promise is supported by a consideration distinct from the price. (1451a) 6

28
Observe, however, that the option is not the contract of sale itself. 7 The optionee has the right, but not the obligation,
to buy. Once the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise
to sell and to buy ensues and both parties are then reciprocally bound to comply with their respective undertakings. 8
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise (policitacion) is merely an
offer. Public advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or
only as proposals. These relations, until a contract is perfected, are not considered binding commitments. Thus, at
any time prior to the perfection of the contract, either negotiating party may stop the negotiation. The offer, at this
stage, may be withdrawn; the withdrawal is effective immediately after its manifestation, such as by its mailing and not
necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the
offeree within which to accept the offer, the following rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to
withdraw the offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of
such fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs.
Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral promise to sell under Art. 1479, modifying the
previous decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of
Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however,
must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a damage claim under Article 19 of the
Civil Code which ordains that "every person must, in the exercise of his rights and in the performance of his duties,
act with justice, give everyone his due, and observe honesty and good faith."
(2) If the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of
that contract to withdraw the offer during the agreed period. The option, however, is an independent contract by itself,
and it is to be distinguished from the projected main agreement (subject matter of the option) which is obviously yet to
be concluded. If, in fact, the optioner-offeror withdraws the offer before its acceptance(exercise of the option) by the
optionee-offeree, the latter may not sue for specific performance on the proposed contract ("object" of the option)
since it has failed to reach its own stage of perfection. The optioner-offeror, however, renders himself liable for
damages for breach of the option. In these cases, care should be taken of the real nature of the consideration given,
for if, in fact, it has been intended to be part of the consideration for the main contract with a right of withdrawal on the
part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest money" in
a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it
cannot be deemed a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first
refusal, understood in its normal concept, per se be brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the same Code. An option or an
offer would require, among other things, 10 a clear certainty on both the object and the cause or consideration of the
envisioned contract. In a right of first refusal, while the object might be made determinate, the exercise of the right,
however, would be dependent not only on the grantor's eventual intention to enter into a binding juridical relation with
another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto, it can at best
be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws
of general application, the pertinent scattered provisions of the Civil Code on human conduct.
Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach
cannot justify correspondingly an issuance of a writ of execution under a judgment that merely recognizes its
existence, nor would it sanction an action for specific performance without thereby negating the indispensable
element of consensuality in the perfection of contracts. 11 It is not to say, however, that the right of first refusal would
be inconsequential for, such as already intimated above, an unjustified disregard thereof, given, for instance, the
circumstances expressed in Article 19 12 of the Civil Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in
favor of petitioners. The consequence of such a declaration entails no more than what has heretofore been said. In
fine, if, as it is here so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the
right of first refusal, the remedy is not a writ of execution on the judgment, since there is none to execute, but an
action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the
property, has acted in good faith or bad faith and whether or not it should, in any case, be considered bound to
respect the registration of the lis pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-41058, cannot
be held subject to the writ of execution issued by respondent Judge, let alone ousted from the ownership and
possession of the property, without first being duly afforded its day in court.

29
We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution
varies the terms of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-21123. The Court of
Appeals, in this regard, has observed:
Finally, the questioned writ of execution is in variance with the decision of the trial court as modified by this Court. As
already stated, there was nothing in said decision 13 that decreed the execution of a deed of sale between the Cu
Unjiengs and respondent lessees, or the fixing of the price of the sale, or the cancellation of title in the name of
petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman
vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885).
It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the
execution of any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August
1991 and 27 September 1991, of the court a quo. Costs against petitioners. SO ORDERED.
SECOND DIVISION
[G.R. No. 128066. June 19, 2000]
JARDINE DAVIES INC., petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY
CORPORATION, respondents.
[G.R. No. 128069 June 19, 2000]
PURE FOODS CORPORATION, petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY
CORPORATION, respondents.
DECISION
BELLOSILLO, J.:
This is rather a simple case for specific performance with damages which could have been resolved through
mediation and conciliation during its infancy stage had the parties been earnest in expediting the disposal of this
case. They opted however to resort to full court proceedings and denied themselves the benefits of alternative dispute
resolution, thus making the process more arduous and long-drawn.
The controversy started in 1992 at the height of the power crisis which the country was then experiencing. To remedy
and curtail further losses due to the series of power failures, petitioner PURE FOODS CORPORATION (hereafter
PUREFOODS) decided to install two (2) 1500 KW generators in its food processing plant in San Roque, Marikina
City.
Sometime in November 1992 a bidding for the supply and installation of the generators was held. Several suppliers
and dealers were invited to attend a pre-bidding conference to discuss the conditions, propose scheme and
specifications that would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders who attended
the pre-bidding conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY CORPORATION
(hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to
5% of their respective bids, as required.
Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po, PUREFOODS
confirmed the award of the contract to FEMSCO Gentlemen:
This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and Installation of two (2)
units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San Roque, Marikina, based on your
proposal number PC 28-92 dated November 20, 1992, subject to the following basic terms and conditions:
1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for the local portion and
the labor for the imported materials, payable by progress billing twice a month, with ten percent (10%) retention. The
retained amount shall be released thirty (30) days after acceptance of the completed project and upon posting of
Guarantee Bond in an amount equivalent to twenty percent (20%) of the contract price. The Guarantee Bond shall be
valid for one (1) year from completion and acceptance of project. The contract price includes future increase/s in
costs of materials and labor;

30
2. The project shall be undertaken pursuant to the attached specifications. It is understood that any item required to
complete the project, and those not included in the list of items shall be deemed included and covered and shall be
performed;
3. All materials shall be brand new;
4. The project shall commence immediately and must be completed within twenty (20) working days after the delivery
of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of the purchase price for every day of delay;
5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price, and shall procure All
Risk Insurance equivalent to the contract price upon commencement of the project. The All Risk Insurance Policy
shall be endorsed in favor of and shall be delivered to Pure Foods Corporation;
6. Warranty of one (1) year against defective material and/or workmanship.
Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and conditions.
Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and contractors allrisk insurance policy in the amount of P6,137,293.00 which PUREFOODS through its Vice President Benedicto G.
Tope acknowledged in a letter dated 18 December 1992. FEMSCO also made arrangements with its principal and
started the PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other hand returned
FEMSCOs Bidders Bond in the amount of P1,000,000.00, as requested.
Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President Teodoro L.
Dimayuga unilaterally canceled the award as "significant factors were uncovered and brought to (their) attention
which dictate (the) cancellation and warrant a total review and re-bid of (the) project." Consequently, FEMSCO
protested the cancellation of the award and sought a meeting with PUREFOODS. However, on 26 March 1993,
before the matter could be resolved, PUREFOODS already awarded the project and entered into a contract with
JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the bidders.
FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease and desist from
delivering and installing the two (2) generators at PUREFOODS. Its demand letters unheeded, FEMSCO sued both
PUREFOODS and JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its unwarranted
interference and inducement. Trial ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to
Evidence.
On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, [1] granted JARDINEs Demurrer to Evidence. The trial court
concluded that "[w]hile it may seem to the plaintiff that by the actions of the two defendants there is something
underhanded going on, this is all a matter of perception, and unsupported by hard evidence, mere suspicions and
suppositions would not stand up very well in a court of law." [2] Meanwhile trial proceeded as regards the case against
PUREFOODS.
On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the sum
of P2,300,000.00 representing the value of engineering services it rendered; (b) to pay FEMSCO the sum of
US$14,000.00 or its peso equivalent, and P900,000.00 representing contractor's mark-up on installation work,
considering that it would be impossible to compel PUREFOODS to honor, perform and fulfill its contractual obligations
in view of PUREFOOD's contract with JARDINE and noting that construction had already started thereon; (c) to pay
attorneys fees in an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The trial court
dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis.
Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27 June 1994
Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal of the
complaint against it, while PUREFOODS appealed the 28 July 1994 Decision of the same court which ordered it to
pay FEMSCO.
On 14 August 1996 the Court of Appeals affirmed in toto the 28 July 1994 Decision of the trial court.[3] It also reversed
the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay FEMSCO damages for inducing
PUREFOODS to violate the latters contract with FEMSCO. As such, JARDINE was ordered to pay
FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS was also directed to pay
FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary damages as well as 20% of the total
amount due as attorney's fees.

31
On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for reconsideration filed by
PUREFOODS and JARDINE. Hence, these two (2) petitions for review filed by PUREFOODS and JARDINE which
were subsequently consolidated.
PUREFOODS maintains that the conclusions of both the trial court and the appellate court are premised on a
misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was not an acceptance of the
latter's bid proposal and award of the project but more of a qualified acceptance constituting a counter-offer which
required FEMSCO's express conforme. Since PUREFOODS never received FEMSCOs conforme, PUREFOODS
was very well within reason to revoke its qualified acceptance or counter-offer. Hence, no contract was perfected
between PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it dealt with
FEMSCO. Hence moral and exemplary damages should not have been awarded.
Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the supposed
contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to violate the latters alleged
contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to moral
damages. But granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely excessive.
In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected contract
between PUREFOODS and FEMSCO; and second, granting there existed a perfected contract, whether there is any
showing that JARDINE induced or connived with PUREFOODS to violate the latter's contract with FEMSCO.
A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or more persons bind
themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to
do."[4] There can be no contract unless the following requisites concur: (a) consent of the contracting parties; (b)
object certain which is the subject matter of the contract; and, (c) cause of the obligation which is established. [5] A
contract binds both contracting parties and has the force of law between them.
Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From
that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and law. [6] To produce a
contract, the acceptance must not qualify the terms of the offer. However, the acceptance may be express or implied.
[7]
For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be
withdrawn or revoked before it is made known to the offeror.
In the instant case, there is no issue as regards the subject matter of the contract and the cause of the obligation. The
controversy lies in the consent - whether there was an acceptance of the offer, and if so, if it was communicated,
thereby perfecting the contract.
To resolve the dispute, there is a need to determine what constituted the offer and the acceptance. Since petitioner
PUREFOODS started the process of entering into the contract by conducting a bidding, Art. 1326 of the Civil Code,
which provides that "[a]dvertisements for bidders are simply invitations to make proposals," applies. Accordingly,
the Terms and Conditions of the Biddingdisseminated by petitioner PUREFOODS constitutes the "advertisement" to
bid on the project. The bid proposals or quotations submitted by the prospective suppliers including respondent
FEMSCO, are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the respective
offers.
Quite obviously, the 12 December 1992 letter of petitioner PUREFOODS to FEMSCO constituted acceptance of
respondent FEMSCOs offer as contemplated by law. The tenor of the letter,i.e., "This will confirm that Pure Foods
has awarded to your firm (FEMSCO) the project," could not be more categorical. While the same letter enumerated
certain "basic terms and conditions," these conditions were imposed on the performance of the obligation rather than
on the perfection of the contract. Thus, the first "condition" was merely a reiteration of the contract price and billing
scheme based on the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The
second and third "conditions" were nothing more than general statements that all items and materials including those
excluded in the list but necessary to complete the project shall be deemed included and should be brand new. The
fourth "condition" concerned the completion of the work to be done, i.e., within twenty (20) days from the delivery of
the generator set, the purchase of which was part of the contract. The fifth "condition" had to do with the putting up of
a performance bond and an all-risk insurance, both of which should be given upon commencement of the project. The
sixth "condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic terms and conditions"
were prescriptions on how the obligation was to be performed and implemented. They were far from being conditions
imposed on the perfection of the contract.

32
In Babasa v. Court of Appeals[8] we distinguished between a condition imposed on the perfection of a contract and a
condition imposed merely on the performance of an obligation. While failure to comply with the first condition results
in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to
protect his interests.
We thus agree with the conclusion of respondent appellate court which affirmed the trial court As can be inferred from the actual phrase used in the first portion of the letter, the decision to award the contract has
already been made. The letter only serves as a confirmation of such decision. Hence, to the Courts mind, there is
already an acceptance made of the offer received by Purefoods. Notwithstanding the terms and conditions
enumerated therein, the offer has been accepted and/or amplified the details of the terms and conditions contained in
the Terms and Conditions of Bidding given out by Purefoods to prospective bidders. [9]
But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a "conditional
counter-offer," respondent FEMCO's submission of the performance bond and contractor's all-risk insurance was an
implied acceptance, if not a clear indication of its acquiescence to, the "conditional counter-offer," which expressly
stated that the performance bond and the contractor's all-risk insurance should be given upon the commencement of
the contract. Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of
FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed
consented to the "conditional counter-offer." After all, as earlier adverted to, an acceptance may either be express or
implied,[10] and this can be inferred from the contemporaneous and subsequent acts of the contracting parties.
Accordingly, for all intents and purposes, the contract at that point has been perfected, and respondent
FEMSCO's conforme would only be a mere surplusage. The discussion of the price of the project two (2) months after
the 12 December 1992 letter can be deemed as nothing more than a pressure being exerted by petitioner
PUREFOODS on respondent FEMSCO to lower the price even after the contract had been perfected. Indeed from
the facts, it can easily be surmised that petitioner PUREFOODS was haggling for a lower price even after agreeing to
the earlier quotation, and was threatening to unilaterally cancel the contract, which it eventually did. Petitioner
PUREFOODS also makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase
orders or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner
PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the project,"
presupposes that the contract has been perfected. For, there can be no cancellation if the contract was not perfected
in the first place.
Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in good faith that no
such contract was perfected. We are not convinced. We subscribe to the factual findings and conclusions of the trial
court which were affirmed by the appellate court Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith
and this was further aggravated by the subsequent inking of a contract between defendant Purefoods and erstwhile
co-defendant Jardine. It is very evident that Purefoods thought that by the expedient means of merely writing a letter
would automatically cancel or nullify the existing contract entered into by both parties after a process of bidding. This,
to the Courts mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings
to which every man is due.[11]
This Court has awarded in the past moral damages to a corporation whose reputation has been besmirched. [12] In the
instant case, respondent FEMSCO has sufficiently shown that its reputation was tarnished after it immediately
ordered equipment from its suppliers on account of the urgency of the project, only to be canceled later. We thus
sustain respondent appellate court's award of moral damages. We however reduce the award from P2,000,000.00
to P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the award of exemplary
damages by way of example for the public good is excessive and should be reduced to P100,000.00.
Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it to pay moral
damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate the contract with FEMSCO. We
agree. While it may seem that petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we
find no specific evidence on record to support such perception. Likewise, there is no showing whatsoever that
petitioner JARDINE induced petitioner PUREFOODS. The similarity in the design submitted to petitioner
PUREFOODS by both petitioner JARDINE and respondent FEMSCO, and the tender of a lower quotation by
petitioner JARDINE are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to
violate its contract with respondent FEMSCO.
WHEREFORE, judgment is hereby rendered as follows:

33
(a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals reversing the 27
June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES, INC., to pay private respondent FAR
EAST MILLS SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET ASIDE for
insufficiency of evidence; and
(b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals ordering petitioner
PURE FOODS CORPORATION to pay private respondent FAR EAST MILLS SUPPLY CORPORATION the sum
of P2,300,000.00 representing the value of engineering services it rendered, US$14,000.00 or its peso equivalent,
and P900,000.00 representing the contractor's mark-up on installation work, as well as attorney's fees equivalent to
twenty percent (20%) of the total amount due, is AFFIRMED. In addtion, petitioner PURE FOODS CORPORATION is
ordered to pay private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount
of P1,000,000.00 and exemplary damages in the amount ofP1,000,000.00. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 120105 March 27, 1998

BF CORPORATION, petitioner,
vs.
COURT OF APPEALS, SHANGRI-LA PROPERTIES, INC., RUFO B. COLAYCO, ALFREDO C. RAMOS, MAXIMO
G. LICAUCO III and BENJAMIN C. RAMOS, respondents.

ROMERO, J.:
The basic issue in this petition for review on certiorari is whether or not the contract for the construction of the EDSA
Plaza between petitioner BF Corporation and respondent Shangri-la Properties, Inc. embodies an arbitration clause in
case of disagreement between the parties in the implementation of contractual provisions.
Petitioner and respondent Shangri-la Properties, Inc. (SPI) entered into an agreement whereby the latter engaged the
former to construct the main structure of the "EDSA Plaza Project," a shopping mall complex in the City of
Mandaluyong. The construction work was in progress when SPI decided to expand the project by engaging the
services of petitioner again. Thus, the parties entered into an agreement for the main contract works after which
construction work began.
However, petitioner incurred delay in the construction work that SPI considered as "serious and substantial." 1 On the
other hand, according to petitioner, the construction works "progressed in faithful compliance with the First Agreement
until a fire broke out on November 30, 1990 damaging Phase I" of the Project. 2 Hence, SPI proposed the renegotiation of the agreement between them.
Consequently, on May 30, 1991, petitioner and SPI entered into a written agreement denominated as "Agreement for
the Execution of Builder's Work for the EDSA Plaza Project." Said agreement would cover the construction work on
said project as of May 1, 1991 until its eventual completion.
According to SPI, petitioner "failed to complete the construction works and abandoned the project." 3 This resulted in
disagreements between the parties as regards their respective liabilities under the contract. On July 12, 1993, upon
SPI's initiative, the parties' respective representatives met in conference but they failed to come to an agreement. 4
Barely two days later or on July 14, 1993, petitioner filed with the Regional Trial Court of Pasig a complaint for
collection of the balance due under the construction agreement. Named defendants therein were SPI and members of
its board of directors namely, Alfredo C. Ramos, Rufo B. Calayco, Antonio B. Olbes, Gerardo O. Lanuza, Jr., Maximo
G. Licauco III and Benjamin C. Ramos.

34
On August 3, 1993, SPI and its co-defendants filed a motion to suspend proceedings instead of filing an answer. The
motion was anchored on defendants' allegation that the formal trade contract for the construction of the project
provided for a clause requiring prior resort to arbitration before judicial intervention could be invoked in any dispute
arising from the contract. The following day, SPI submitted a copy of the conditions of the contract containing the
arbitration clause that it failed to append to its motion to suspend proceedings.
Petitioner opposed said motion claiming that there was no formal contract between the parties although they entered
into an agreement defining their rights and obligations in undertaking the project. It emphasized that the agreement
did not provide for arbitration and therefore the court could not be deprived of jurisdiction conferred by law by the
mere allegation of the existence of an arbitration clause in the agreement between the parties.
In reply to said opposition, SPI insisted that there was such an arbitration clause in the existing contract between
petitioner and SPI. It alleged that suspension of proceedings would not necessarily deprive the court of its jurisdiction
over the case and that arbitration would expedite rather than delay the settlement of the parties' respective claims
against each other.
In a rejoinder to SPI's reply, petitioner reiterated that there was no arbitration clause in the contract between the
parties. It averred that granting that such a clause indeed formed part of the contract, suspension of the proceedings
was no longer proper. It added that defendants should be declared in default for failure to file their answer within the
reglementary period.
In its sur-rejoinder, SPI pointed out the significance of petitioner's admission of the due execution of the "Articles of
Agreement." Thus, on page D/6 thereof, the signatures of Rufo B. Colayco, SPI president, and Bayani Fernando,
president of petitioner appear, while page D/7 shows that the agreement is a public document duly notarized on
November 15, 1991 by Notary Public Nilberto R. Briones as document No. 345, page 70, book No. LXX, Series of
1991 of his notarial register. 5
Thereafter, upon a finding that an arbitration clause indeed exists, the lower court 6 denied the motion to suspend
proceedings, thus:
It appears from the said document that in the letter-agreement dated May 30, 1991 (Annex C, Complaint), plaintiff BF
and defendant Shangri-La Properties, Inc. agreed upon the terms and conditions of the Builders Work for the EDSA
Plaza Project (Phases I, II and Carpark), subject to the execution by the parties of a formal trade contract. Defendants
have submitted a copy of the alleged trade contract, which is entitled "Contract Documents For Builder's Work Trade
Contractor" dated 01 May 1991, page 2 of which is entitled "Contents of Contract Documents" with a list of the
documents therein contained, and Section A thereof consists of the abovementioned Letter-Agreement dated May 30,
1991. Section C of the said Contract Documents is entitled "Articles of Agreement and Conditions of Contract" which,
per its Index, consists of Part A (Articles of Agreement) and B (Conditions of Contract). The said Articles of Agreement
appears to have been duly signed by President Rufo B. Colayco of Shangri-La Properties, Inc. and President Bayani
F. Fernando of BF and their witnesses, and was thereafter acknowledged before Notary Public Nilberto R. Briones of
Makati, Metro Manila on November 15, 1991. The said Articles of Agreement also provides that the "Contract
Documents" therein listed "shall be deemed an integral part of this Agreement", and one of the said documents is the
"Conditions of Contract" which contains the Arbitration Clause relied upon by the defendants in their Motion to
Suspend Proceedings.
This Court notes, however, that the 'Conditions of Contract' referred to, contains the following provisions:
3. Contract Document.
Three copies of the Contract Documents referred to in the Articles of Agreement shall be signed by the parties to the
contract and distributed to the Owner and the Contractor for their safe keeping." (emphasis supplied).
And it is significant to note further that the said "Conditions of Contract" is not duly signed by the parties on any page
thereof although it bears the initials of BF's representatives (Bayani F. Fernando and Reynaldo M. de la Cruz)
without the initials thereon of any representative of Shangri-La Properties, Inc.
Considering the insistence of the plaintiff that the said Conditions of Contract was not duly executed or signed by the
parties, and the failure of the defendants to submit any signed copy of the said document, this Court entertains
serious doubt whether or not the arbitration clause found in the said Conditions of Contract is binding upon the parties
to the Articles of Agreement." (Emphasis supplied.)
The lower court then ruled that, assuming that the arbitration clause was valid and binding, still, it was "too late in the
day for defendants to invoke arbitration." It quoted the following provision of the arbitration clause:
Notice of the demand for arbitration of a dispute shall be filed in writing with the other party to the contract and a copy
filed with the Project Manager. The demand for arbitration shall be made within a reasonable time after the dispute

35
has arisen and attempts to settle amicably have failed; in no case, however, shall the demand he made be later than
the time of final payment except as otherwise expressly stipulated in the contract.
Against the above backdrop, the lower court found that per the May 30, 1991 agreement, the project was to be
completed by October 31, 1991. Thereafter, the contractor would pay P80,000 for each day of delay counted from
November 1, 1991 with "liquified (sic) damages up to a maximum of 5% of the total contract price."
The lower court also found that after the project was completed in accordance with the agreement that contained a
provision on "progress payment billing," SPI "took possession and started operations thereof by opening the same to
the public in November, 1991." SPI, having failed to pay for the works, petitioner billed SPI in the total amount of
P110,883,101.52, contained in a demand letter sent by it to SPI on February 17, 1993. Instead of paying the amount
demanded, SPI set up its own claim of P220,000,000.00 and scheduled a conference on that claim for July 12, 1993.
The conference took place but it proved futile.
Upon the above facts, the lower court concluded:
Considering the fact that under the supposed Arbitration Clause invoked by defendants, it is required that "Notice of
the demand for arbitration of a dispute shall be filed in writing with the other party . . . . in no case . . . . later than the
time of final payment . . . "which apparently, had elapsed, not only because defendants had taken possession of the
finished works and the plaintiff's billings for the payment thereof had remained pending since November, 1991 up to
the filing of this case on July 14, 1993, but also for the reason that defendants have failed to file any written notice of
any demand for arbitration during the said long period of one year and eight months, this Court finds that it cannot
stay the proceedings in this case as required by Sec. 7 of Republic Act No. 876, because defendants are in default in
proceeding with such arbitration.
The lower court denied SPI's motion for reconsideration for lack of merit and directed it and the other defendants to
file their responsive pleading or answer within fifteen (15) days from notice.
Instead of filing an answer to the complaint, SPI filed a petition for certiorari under Rule 65 of the Rules of Court
before the Court of Appeals. Said appellate court granted the petition, annulled and set aside the orders and stayed
the proceedings in the lower court. In so ruling, the Court of Appeals held:
The reasons given by the respondent Court in denying petitioners' motion to suspend proceedings are untenable.
1. The notarized copy of the articles of agreement attached as Annex A to petitioners' reply dated August 26, 1993,
has been submitted by them to the respondent Court (Annex G, petition). It bears the signature of petitioner Rufo B.
Colayco, president of petitioner Shangri-La Properties, Inc., and of Bayani Fernando, president of respondent
Corporation (Annex G-1, petition). At page D/4 of said articles of agreement it is expressly provided that the
conditions of contract are "deemed an integral part" thereof (page 188, rollo). And it is at pages D/42 to D/44 of the
conditions of contract that the provisions for arbitration are found (Annexes G-3 to G-5, petition, pp. 227-229). Clause
No. 35 on arbitration specifically provides:
Provided always that in case any dispute or difference shall arise between the Owner or the Project Manager on his
behalf and the Contractor, either during the progress or after the completion or abandonment of the Works as to the
construction of this Contract or as to any matter or thing of whatsoever nature arising thereunder or in connection
therewith (including any matter or being left by this Contract to the discretion of the Project Manager or the
withholding by the Project Manager of any certificate to which the Contractor may claim to be entitled or the
measurement and valuation mentioned in clause 30 (5) (a) of these Conditions' or the rights and liabilities of the
parties under clauses 25, 26, 32 or 33 of these Conditions), the Owner and the Contractor hereby agree to exert all
efforts to settle their differences or dispute amicably. Failing these efforts then such dispute or difference shall be
referred to Arbitration in accordance with the rules and procedures of the Philippine Arbitration Law.
The fact that said conditions of contract containing the arbitration clause bear only the initials of respondent
Corporation's representatives, Bayani Fernando and Reynaldo de la Cruz, without that of the representative of
petitioner Shangri-La Properties, Inc. does not militate against its effectivity. Said petitioner having categorically
admitted that the document, Annex A to its reply dated August 26, 1993 (Annex G, petition), is the agreement between
the parties, the initial or signature of said petitioner's representative to signify conformity to arbitration is no longer
necessary. The parties, therefore, should be allowed to submit their dispute to arbitration in accordance with their
agreement.
2. The respondent Court held that petitioners "are in default in proceeding with such arbitration." It took note of "the
fact that under the supposed Arbitration Clause invoked by defendants, it is required that "Notice of the demand for
arbitration of a dispute shall be filed in writing with the other party . . . in no case . . . later than the time of final
payment," which apparently, had elapsed, not only because defendants had taken possession of the finished works
and the plaintiff's billings for the payment thereof had remained pending since November, 1991 up to the filing of this
case on July 14, 1993, but also for the reason that defendants have failed to file any written notice of any demand for
arbitration during the said long period of one year and eight months, . . . ."

36
Respondent Court has overlooked the fact that under the arbitration
clause
Notice of the demand for arbitration dispute shall be filed in writing with the other party to the contract and a copy filed
with the Project Manager. The demand for arbitration shall be made within a reasonable time after the dispute has
arisen and attempts to settle amicably had failed; in no case, however, shall the demand be made later than the time
of final payment except as otherwise expressly stipulated in the contract (emphasis supplied)
quoted in its order (Annex A, petition). As the respondent Court there said, after the final demand to pay the amount of
P110,883,101.52, instead of paying, petitioners set up its own claim against respondent Corporation in the amount of
P220,000,000.00 and set a conference thereon on July 12, 1993. Said conference proved futile. The next day, July
14, 1993, respondent Corporation filed its complaint against petitioners. On August 13, 1993, petitioners wrote to
respondent Corporation requesting arbitration. Under the circumstances, it cannot be said that petitioners' resort to
arbitration was made beyond reasonable time. Neither can they be considered in default of their obligation to
respondent Corporation.
Hence, this petition before this Court. Petitioner assigns the following errors:
A
THE COURT OF APPEALS ERRED IN ISSUING THE EXTRAORDINARY WRIT OF CERTIORARIALTHOUGH THE
REMEDY OF APPEAL WAS AVAILABLE TO RESPONDENTS.
B
THE COURT OF APPEALS ERRED IN FINDING GRAVE ABUSE OF DISCRETION IN THE FACTUAL FINDINGS OF
THE TRIAL COURT THAT:
(i) THE PARTIES DID NOT ENTER INTO AN AGREEMENT TO ARBITRATE.
(ii) ASSUMING THAT THE PARTIES DID ENTER INTO THE AGREEMENT TO ARBITRATE, RESPONDENTS ARE
ALREADY IN DEFAULT IN INVOKING THE AGREEMENT TO ARBITRATE.
On the first assigned error, petitioner contends that the Order of the lower court denying the motion to suspend
proceedings "is a resolution of an incident on the merits." As such, upon the continuation of the proceedings, the
lower court would appreciate the evidence adduced in their totality and thereafter render a decision on the merits that
may or may not sustain the existence of an arbitration clause. A decision containing a finding that the contract has no
arbitration clause can then be elevated to a higher court "in an ordinary appeal" where an adequate remedy could be
obtained. Hence, to petitioner, the Court of Appeals should have dismissed the petition forcertiorari because the
remedy of appeal would still be available to private respondents at the proper time. 7
The above contention is without merit.
The rule that the special civil action of certiorari may not be invoked as a substitute for the remedy of appeal is
succinctly reiterated in Ongsitco v. Court of Appeals 8 as follows:
. . . . Countless times in the past, this Court has held that "where appeal is the proper remedy,certiorari will not lie."
The writs of certiorari and prohibition are remedies to correct lack or excess of jurisdiction or grave abuse of discretion
equivalent to lack of jurisdiction committed by a lower court. "Where the proper remedy is appeal, the action
for certiorari will not be entertained. . . . Certiorari is not a remedy for errors of judgment. Errors of judgment are
correctible by appeal, errors of jurisdiction are reviewable by certiorari."
Rule 65 is very clear. The extraordinary remedies of certiorari, prohibition and mandamus are available only when
"there is no appeal or any plain, speedy and adequate remedy in the ordinary course of law . . . ." That is why they
are referred to as "extraordinary." . . . .
The Court has likewise ruled that "certiorari will not be issued to cure errors in proceedings or correct erroneous
conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise
of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by timely appeal and not
by a special civil action of certiorari." 9
This is not exactly so in the instant case. While this Court does not deny the eventual jurisdiction of the lower court
over the controversy, the issue posed basically is whether the lower court prematurely assumed jurisdiction over it. If
the lower court indeed prematurely assumed jurisdiction over the case, then it becomes an error of jurisdiction which
is a proper subject of a petition for certiorari before the Court of Appeals. And if the lower court does not have

37
jurisdiction over the controversy, then any decision or order it may render may be annulled and set aside by the
appellate court.
However, the question of jurisdiction, which is a question of law depends on the determination of the existence of the
arbitration clause, which is a question of fact. In the instant case, the lower court found that there exists an arbitration
clause. However, it ruled that in contemplation of law, said arbitration clause does not exist.
The issue, therefore, posed before the Court of Appeals in a petition for certiorari is whether the Arbitration Clause
does not in fact exist. On its face, the the question is one of fact which is not proper in a petition forcertiorari.
The Court of Appeals found that an Arbitration Clause does in fact exist. In resolving said question of fact, the Court of
Appeals interpreted the construction of the subject contract documents containing the Arbitration Clause in
accordance with Republic Act No. 876 (Arbitration Law) and existing jurisprudence which will be extensively
discussed hereunder. In effect, the issue posed before the Court of Appeals was likewise a question of law. Being a
question of law, the private respondents rightfully invoked the special civil action of certiorari.
It is that mode of appeal taken by private respondents before the Court of Appeals that is being questioned by the
petitioners before this Court. But at the heart of said issue is the question of whether there exists an Arbitration
Clause because if an Arbitration Clause does not exist, then private respondents took the wrong mode of appeal
before the Court of Appeals.
For this Court to be able to resolve the question of whether private respondents took the proper mode of appeal,
which, incidentally, is a question of law, then it has to answer the core issue of whether there exists an Arbitration
Clause which, admittedly, is a question of fact.
Moreover, where a rigid application of the rule that certiorari cannot be a substitute for appeal will result in a manifest
failure or miscarriage of justice, the provisions of the Rules of Court which are technical rules may be relaxed. 10 As
we shall show hereunder, had the Court of Appeals dismissed the petition for certiorari, the issue of whether or not an
arbitration clause exists in the contract would not have been resolved in accordance with evidence extant in the
record of the case. Consequently, this would have resulted in a judicial rejection of a contractual provision agreed by
the parties to the contract.
In the same vein, this Court holds that the question of the existence of the arbitration clause in the contract between
petitioner and private respondents is a legal issue that must be determined in this petition for review oncertiorari.
Petitioner, while not denying that there exists an arbitration clause in the contract in question, asserts that in
contemplation of law there could not have been one considering the following points. First, the trial court found that
the "conditions of contract" embodying the arbitration clause is not duly signed by the parties. Second, private
respondents misrepresented before the Court of Appeals that they produced in the trial court a notarized duplicate
original copy of the construction agreement because what were submitted were mere photocopies thereof. The
contract(s) introduced in court by private respondents were therefore "of dubious authenticity" because: (a) the
Agreement for the Execution of Builder's Work for the EDSA Plaza Project does not contain an arbitration clause, (b)
private respondents "surreptitiously attached as Annexes "G-3" to "G-5" to their petition before the Court of Appeals
but these documents are not parts of the Agreement of the parties as "there was no formal trade contract executed,"
(c) if the entire compilation of documents "is indeed a formal trade contract," then it should have been duly notarized,
(d) the certification from the Records Management and Archives Office dated August 26, 1993 merely states that "the
notarial record of Nilberto Briones . . . is available in the files of (said) office as Notarial Registry Entry only," (e) the
same certification attests that the document entered in the notarial registry pertains to the Articles of Agreement only
without any other accompanying documents, and therefore, it is not a formal trade contract, and (f) the compilation
submitted by respondents are a "mere hodge-podge of documents and do not constitute a single intelligible
agreement."
In other words, petitioner denies the existence of the arbitration clause primarily on the ground that the
representatives of the contracting corporations did not sign the "Conditions of Contract" that contained the said
clause. Its other contentions, specifically that insinuating fraud as regards the alleged insertion of the arbitration
clause, are questions of fact that should have been threshed out below.
This Court may as well proceed to determine whether the arbitration clause does exist in the parties' contract.
Republic Act No. 876 provides for the formal requisites of an arbitration agreement as follows:
Sec. 4. Form of arbitration agreement. A contract to arbitrate a controversy thereafter arising between the parties,
as well as a submission to arbitrate an existing controversy, shall be in writing and subscribed by the party sought to
be charged, or by his lawful agent.
The making of a contract or submission for arbitration described in section two hereof, providing for arbitration of any
controversy, shall be deemed a consent of the parties of the province or city where any of the parties resides, to
enforce such contract of submission. (Emphasis supplied.).

38
The formal requirements of an agreement to arbitrate are therefore the following: (a) it must be in writing and (b) it
must be subscribed by the parties or their representatives. There is no denying that the parties entered into a written
contract that was submitted in evidence before the lower court. To "subscribe" means to write underneath, as one's
name; to sign at the end of a document. 11 That word may sometimes be construed to mean to give consent to or to
attest. 12
The Court finds that, upon a scrutiny of the records of this case, these requisites were complied with in the contract in
question. The Articles of Agreement, which incorporates all the other contracts and agreements between the parties,
was signed by representatives of both parties and duly notarized. The failure of the private respondent's
representative to initial the "Conditions of Contract" would therefor not affect compliance with the formal requirements
for arbitration agreements because that particular portion of the covenants between the parties was included by
reference in the Articles of Agreement.
Petitioner's contention that there was no arbitration clause because the contract incorporating said provision is part of
a "hodge-podge" document, is therefore untenable. A contract need not be contained in a single writing. It may be
collected from several different writings which do not conflict with each other and which, when connected, show the
parties, subject matter, terms and consideration, as in contracts entered into by correspondence. 13 A contract may be
encompassed in several instruments even though every instrument is not signed by the parties, since it is sufficient if
the unsigned instruments are clearly identified or referred to and made part of the signed instrument or instruments.
Similarly, a written agreement of which there are two copies, one signed by each of the parties, is binding on both to
the same extent as though there had been only one copy of the agreement and both had signed it. 14
The flaw in petitioner's contentions therefore lies in its having segmented the various components of the whole
contract between the parties into several parts. This notwithstanding, petitioner ironically admits the execution of the
Articles of Agreement. Notably, too, the lower court found that the said Articles of Agreement "also provides that the
'Contract Documents' therein listed 'shall be deemed an integral part of this Agreement,' and one of the said
documents is the 'Conditions of Contract' which contains the Arbitration Clause.'" It is this Articles of Agreement that
was duly signed by Rufo B. Colayco, president of private respondent SPI, and Bayani F. Fernando, president of
petitioner corporation. The same agreement was duly subscribed before notary public Nilberto R. Briones. In other
words, the subscription of the principal agreement effectively covered the other documents incorporated by reference
therein.
This Court likewise does not find that the Court of Appeals erred in ruling that private respondents were not in default
in invoking the provisions of the arbitration clause which states that "(t)he demand for arbitration shall be made within
a reasonable time after the dispute has arisen and attempts to settle amicably had failed." Under the factual milieu,
private respondent SPI should have paid its liabilities tinder the contract in accordance with its terms. However,
misunderstandings appeared to have cropped up between the parties ostensibly brought about by either delay in the
completion of the construction work or by force majeure or the fire that partially gutted the project. The almost twoyear delay in paying its liabilities may not therefore be wholly ascribed to private respondent SPI.
Besides, private respondent SPI's initiative in calling for a conference between the parties was a step towards the
agreed resort to arbitration. However, petitioner posthaste filed the complaint before the lower court. Thus, while
private respondent SPI's request for arbitration on August 13, 1993 might appear an afterthought as it was made after
it had filed the motion to suspend proceedings, it was because petitioner also appeared to act hastily in order to
resolve the controversy through the courts.
The arbitration clause provides for a "reasonable time" within which the parties may avail of the relief under that
clause. "Reasonableness" is a relative term and the question of whether the time within which an act has to be done
is reasonable depends on attendant circumstances. 15 This Court finds that under the circumstances obtaining in this
case, a one-month period from the time the parties held a conference on July 12, 1993 until private respondent SPI
notified petitioner that it was invoking the arbitration clause, is a reasonable time. Indeed, petitioner may not be
faulted for resorting to the court to claim what was due it under the contract. However, we find its denial of the
existence of the arbitration clause as an attempt to cover up its misstep in hurriedly filing the complaint before the
lower court.
In this connection, it bears stressing that the lower court has not lost its jurisdiction over the case. Section 7 of
Republic Act No. 876 provides that proceedings therein have only been stayed. After the special proceeding of
arbitration 16 has been pursued and completed, then the lower court may confirm the award 17 made by the arbitrator.
It should be noted that in this jurisdiction, arbitration has been held valid and constitutional. Even before the approval
on June 19, 1953 of Republic Act No. 876, this Court has countenanced the settlement of disputes through
arbitration. 18 Republic Act No. 876 was adopted to supplement the New Civil Code's provisions on arbitration. 19 Its
potentials as one of the alternative dispute resolution methods that are now rightfully vaunted as "the wave of the
future" in international relations, is recognized worldwide. To brush aside a contractual agreement calling for
arbitration in case of disagreement between the parties would therefore be a step backward.

39
WHEREFORE, the questioned Decision of the Court of Appeals is hereby AFFIRMED and the petition
for certiorariDENIED. This Decision is immediately executory. Costs against petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 144732

February 13, 2006

ROLANDO LIMPO, Petitioner,

vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, Respondents.
DECISION
AZCUNA, J.:
For consideration in this petition for review are the resolutions of the Court of Appeals in CA-G.R. CV No. 45821
dated April 5, 2000 and August 30, 2000, respectively.
Both parties have accepted the factual account narrated by the Court of Appeals 1 and have identically quoted the
portion of the assailed decision pertaining thereto in their memoranda. Accordingly, the Court adopts said findings,
which are reproduced as follows:
On November 11, 1980, plaintiff Security Bank & Trust Company filed a complaint for a Sum of Money with the
Regional Trial Court of Pasig, Branch 158 entitled "Security Bank & Trust Company, plaintiff, - versus Miguel F. Uy,
Brigitte E. Uy and Rolando Limpo, defendants[.]" Plaintiff Bank sought to recover the outstanding balance of a
promissory note executed by the defendants.
On February 1, 1983, defendants-spouses Miguel F. Uy and Brigitte Uy entered into a Compromise Agreementwith
plaintiff bank. On March 22, 1983, the trial court rendered decision, reproducing therein the pertinent provisions of
the Compromise Agreement as follows:
"1. Defendant spouses admit liability to the plaintiff the said amount of P38,833.44 as of January 12, 1983;
2. Defendant spouses agree to pay the plaintiff the said amount of P38,833.44 with interest at the rate of 20% per
annum with aforesaid interest rate computed based on declining balance, from January 12, 1983 in the following
manner:
a) P4,644.00 on or before March 14, 1983 of which P500.00 shall be applied as attorneys fee;P144.00 the cost of
suit, and the remaining balance to the outstanding loan obligation;
b) P4,000.00 each on or before the 15th day of each month commencing April 1983 until June 1, 1983;
c) P1,500.00 on or before the 15th day of each month commencing July 1983 until the balance and accruing interest
thereon is fully paid.
3. In case of failure to pay any installment when due, the whole balance shall become due and payable, without
necessity of demand and defendant spouses shall be assessed a default penalty of 3% per month until the obligation
is fully paid. Moreover, plaintiff shall be entitled to a writ of execution upon ex-parte motion." (RTC Decision, p. 1)
When defendants failed to comply with the terms and conditions of the compromise agreement, plaintiff bank, on
November 27, 1984, filed an Ex-Parte Motion for the Issuance of Writ of Execution. The motion not having been acted
upon, plaintiff bank, on July 22, 1992, filed a complaint for Revival of Judgment.
The defendant-spouses, in their Answer, alleged as their defense laches, for failure of plaintiff bank to enforce its
rights for more than eight (8) years. Defendant Limpo, on the other hand, alleged that "he is not obligated to pay any
amount to plaintiff under the said compromise agreement which was entered into only by and between plaintiff and
defendant spouses Miguel F. Uy and Brigitte E. Uy without his knowledge and consent." (Records, p. 31)

40
On February 5, 1993, plaintiff bank filed a Motion for Judgment on the Pleadings alleging that defendants spouses
Answer failed to tender genuine issues. On April 20, 1993, the trial court issued an order against defendants spouses
ordering them to pay plaintiff bank the amount of P38,833.44 with interest at the rate of 20% per annum computed
from January 12, 1983 until the amount is fully paid. Defendant-spouses appealed this decision to the Court of
Appeals, but said appeal was ordered dismissed by this Courts Special Fifth Division for defendants spouses abuse
of the extensions of time granted them, pursuant to Section 1 (f) of Rule 50 of the Rules of Court (Rollo, p. 84).
Meanwhile, on June 30, 1993, defendant Limpo filed a Manifestation and Motion praying for the dismissal of the
complaint on the ground that the judgment sought to be revived did not include defendant Limpo. After responsive
pleadings were filed by the parties, the trial court issued an Order dated November 3, 1993 dismissing the complaint
against defendant Limpo. This Order was reiterated by the trial court in the Order dated April 19, 1994 which likewise
dismissed defendant Limpos compulsory counterclaim.
Not satisfied with the Order of the trial court, plaintiff bank filed the appeal at bench.
Plaintiff-appellant Security Bank & Trust Company assails the Order of the trial court on the basis of the sole assigned
error, to wit:
"THE LOWER COURT ERRED IN DISMISSING THE INSTANT COMPLAINT AGAINST DEFENDANT-APPELLANT
ROLANDO LIMPO." (Appellants Brief, p. 3)
At first, the Court of Appeals dismissed the appeal holding that the Compromise Agreement had superseded the
promissory note executed between the payee Security Bank & Trust Company (the Bank) and the makers spouses
Miguel F. Uy and Brigitte E. Uy (spouses Uy) and Rolando Limpo (Limpo). Limpo, inasmuch as he was never a party
to the new agreement, was held to be not bound by its terms and, therefore, was no longer obligated to the Bank.
Upon the Banks motion for reconsideration, however, the Court of Appeals reversed itself and ordered the
continuation of proceedings in Civil Case No. 62226 against Limpo.
In this petition, Limpo presents the following issues to be resolved: 2
1. Whether Rolando Limpo is bound under the Compromise Agreement entered into by Security Bank Corporation
and defendants Miguel Uy and Brigitte Uy.
2. Whether Rolando Limpo is liable to Security Bank Corporation under the trial courts judgment dated March 22,
1983 which was based on the Compromise Agreement entered into by Security Bank and the defendants Miguel Uy
and Brigitte Uy.
3. Whether the action by Security Bank against Rolando Limpo, as co-maker of defendants Miguel Uy and Brigitte Uy,
[was] already barred by prescription when the action for revival of judgment was filed on July 22, 1992.
Anent the first two issues, Limpo takes for the negative. He maintains that the Compromise Agreement was executed
without his participation and so the trial courts judgment based on compromise, by obvious consequence, did not and
could not have included him as a judgment debtor. Under this circumstance, there would be no basis to include him
as a defendant in a complaint for revival of judgment.
With respect to the second issue, Limpo answers in the affirmative. He avers that an action based on the promissory
note, being a written contract, prescribes in ten years. Continuing from this premise, he computes that the right of
action under the promissory note accrued when it became due and demandable on September 19, 1979 and was
suspended upon institution of the action to collect on the note on November 11, 1980. By then, one year, one month
and twenty-three days had elapsed. The period began to run again on March 22, 1983, when the judgment approving
the Compromise Agreement was issued, and was tolled upon the filing of the complaint for revival of judgment on July
22, 1992. This next interval adds up to approximately nine years and four months. Add this to the first interval, the
total period that had run would already be ten years and five months, making any suit on the promissory note barred
by prescription.
The Court finds the petition meritorious.1avvphil.net
It is settled that a compromise agreement cannot bind persons who are not parties to it. 3 This rule is based on Article
1311(1) of the Civil Code which provides that "contracts take effect only between the parties, their assigns and heirs x
x x." The sound reason for the exclusion of non-parties to an agreement is the absence of a vinculumor juridical tie
which is the efficient cause for the establishment of an obligation. In the Compromise Agreement that was presented
to the trial court, there is no question that only the spouses Uy and the Bank were parties. Limpo did not participate in
its execution and there was no reference to him in any of its provisions. He cannot be bound by the Compromise
Agreement.

41
What happens then if the court approves a compromise agreement that fails to include all of the defendants? In
approving a compromise agreement, no court can impose upon the parties a judgment different from their real
agreement or against the very terms and conditions of the amicable settlement entered into. 4 The principle of
autonomy of contracts must be respected.5 These being said, considering that the Compromise Agreement imposed
no obligation upon Limpo, it follows that the judgment rendered by the Regional Trial Court (RTC) of Pasig, based on
the Compromise Agreement, could likewise not impose any obligation upon him. The duty of the court is confined to
the interpretation of the agreement that the contracting parties have made for themselves without regard to its wisdom
or folly as the court cannot supply material stipulations or read into the contract words which it does not
contain.6 Consequently, the contention of Limpo is correct. The terms and conditions set forth in the Compromise
Agreement, as approved by the court, are controlling 7 and, therefore, there is no basis to include him in reviving the
judgment.
However, there remains the question of whether the Bank may still continue the proceedings against Limpo in Civil
Case No. 62226, as concluded by the Court of Appeals.
The Court of Appeals gives the following reason:
x x x If the spouses Uy would become insolvent and could not pay their obligation under the Compromise Agreement,
the SBTC [the Bank] could collect the whole amount of the obligation from defendant Rolando Limpo. A judgment,
therefore, against Rolando Limpo would not be incompatible with the existence of the Compromise Agreement for in
such a situation SBTC could exercise its option to secure execution of judgment against either or both the Uys and
Limpo. The only limitation is that SBTC could not collect more than the total amount of indebtedness.
The sound reasoning of the Court of Appeals as to the liabilities of a solidary debtor is correct. However, it failed to
consider two important incidents that make this case distinct: 1) a judgment had been rendered excluding Limpo; and
2) such judgment had become final.
A compromise agreement once approved by order of the court becomes immediately final and executory with the
force of res judicata.8 The courts sanction imbues it with the same effect as any other judgment. 9 No doubt that as to
the spouses Uy, there was a clear declaration of liability. Debate arises with respect to Limpo who was never
mentioned in both the agreement and the judgment despite that fact that he was impleaded as a defendant. How
should this omission affect him?
Judicial precedent as to the implication of a judgment approving a compromise agreement that fails to expressly
mention or include all the defendants is found in Bopis v. Provincial Sheriff of Camarines Norte,10 the facts of which
are akin to those of this case. There, four defendants, Camino, Eco, Guadalupe and Bopis, were sued by the plaintiff
for recovery of possession of real property. Later, a compromise agreement was executed among Camino, Eco and
the plaintiff, whereby Camino and Eco agreed to pay the plaintiff a sum of money. The compromise agreement was
later approved by the trial court. Camino and Eco, however, failed to pay the entire amount and, as a result, a writ of
execution was issued against all four defendants. Guadalupe and Bopis questioned their inclusion in the writ of
execution since the judgment approving the agreement did not include them. This Court found their contention
meritorious and declared the writ of execution null and void with respect to Guadalupe and Bopis. Quoting from the
Decision:
As will be seen, only Rufina Camino and Pasto Eco were adjudged to pay Alfonso Ortega the amount of P140.00 on
February 28, 1951. Although they were included as party defendants, the spouses Fermin Bopis and Emilia
Guadalupe were not ordered to pay Alfonso Ortega. Obviously, they were absolved from liability. Accordingly, as to
them, there was nothing to execute since they have been absolved from liability.
The Court, in that case, ostensibly concluded that a decision that fails to expressly mention the liability of one of the
defendants will be taken to mean that he has been absolved in that case. From this pronouncement, the failure to
mention Limpo in the judgment of the RTC of Pasig will correspondingly mean his absence of liability to the Bank. As
this implied declaration became final with the approval of the Compromise Agreement, the Court of Appeals
instructions to continue the proceedings against Limpo in Civil Case No. 62226 amount to an alteration of a matter
that is already res judicata.
Since Limpo is no longer liable to the Bank, the issue of prescription is not necessary to resolve.
WHEREFORE, the resolutions of the Court of Appeals dated April 5, 2000 and August 30, 2000 in CA-G.R. CV No.
45821 are hereby REVERSED and SET ASIDE. Rolando Limpo is ordered DROPPED as a defendant in Civil Case
No. 62226. No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION

42
[G.R. No. 126376. November 20, 2003]
SPOUSES BERNARDO BUENAVENTURA and CONSOLACION JOAQUIN, SPOUSES JUANITO EDRA and
NORA JOAQUIN, SPOUSES RUFINO VALDOZ and EMMA JOAQUIN, and NATIVIDAD JOAQUIN, petitioners,
vs. COURT OF APPEALS, SPOUSES LEONARDO JOAQUIN and FELICIANA LANDRITO, SPOUSES FIDEL
JOAQUIN and CONCHITA BERNARDO, SPOUSES TOMAS JOAQUIN and SOLEDAD ALCORAN, SPOUSES
ARTEMIO JOAQUIN and SOCORRO ANGELES, SPOUSES ALEXANDER MENDOZA and CLARITA JOAQUIN,
SPOUSES TELESFORO CARREON and FELICITAS JOAQUIN, SPOUSES DANILO VALDOZ and FE JOAQUIN,
and SPOUSES GAVINO JOAQUIN and LEA ASIS, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari[1] to annul the Decision[2] dated 26 June 1996 of the Court of Appeals in CAG.R. CV No. 41996. The Court of Appeals affirmed the Decision [3] dated18 February 1993 rendered by Branch 65 of
the Regional Trial Court of Makati (trial court) in Civil Case No. 89-5174. The trial court dismissed the case after it
found that the parties executed the Deeds of Sale for valid consideration and that the plaintiffs did not have a cause of
action against the defendants.
The Facts
The Court of Appeals summarized the facts of the case as follows:
Defendant spouses Leonardo Joaquin and Feliciana Landrito are the parents of plaintiffs Consolacion, Nora, Emma
and Natividad as well as of defendants Fidel, Tomas, Artemio, Clarita, Felicitas, Fe, and Gavino, all surnamed
JOAQUIN. The married Joaquin children are joined in this action by their respective spouses.
Sought to be declared null and void ab initio are certain deeds of sale of real property executed by defendant parents
Leonardo Joaquin and Feliciana Landrito in favor of their co-defendant children and the corresponding certificates of
title issued in their names, to wit:
1. Deed of Absolute Sale covering Lot 168-C-7 of subdivision plan (LRC) Psd-256395 executed on 11 July 1978, in
favor of defendant Felicitas Joaquin, for a consideration of P6,000.00 (Exh. C), pursuant to which TCT No. [36113/T172] was issued in her name (Exh. C-1);
2. Deed of Absolute Sale covering Lot 168-I-3 of subdivision plan (LRC) Psd-256394 executed on 7 June 1979, in
favor of defendant Clarita Joaquin, for a consideration of P1[2],000.00 (Exh. D), pursuant to which TCT No. S109772 was issued in her name (Exh. D-1);
3 Deed of Absolute Sale covering Lot 168-I-1 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in
favor of defendant spouses Fidel Joaquin and Conchita Bernardo, for a consideration of P54,[3]00.00 (Exh. E),
pursuant to which TCT No. 155329 was issued to them (Exh. E-1);
4. Deed of Absolute Sale covering Lot 168-I-2 of subdivision plan (LRC) Psd-256394 executed on 12 May 1988, in
favor of defendant spouses Artemio Joaquin and Socorro Angeles, for a consideration of P[54,3]00.00 (Exh. F),
pursuant to which TCT No. 155330 was issued to them (Exh. F-1); and
5. Absolute Sale of Real Property covering Lot 168-C-4 of subdivision plan (LRC) Psd-256395 executed on 9
September 1988, in favor of Tomas Joaquin, for a consideration of P20,000.00 (Exh. G), pursuant to which TCT No.
157203 was issued in her name (Exh. G-1).
[6. Deed of Absolute Sale covering Lot 168-C-1 of subdivision plan (LRC) Psd-256395 executed on 7 October 1988,
in favor of Gavino Joaquin, for a consideration of P25,000.00 (Exh. K), pursuant to which TCT No. 157779 was
issued in his name (Exh. K-1).]
In seeking the declaration of nullity of the aforesaid deeds of sale and certificates of title, plaintiffs, in their complaint,
aver:
- XXThe deeds of sale, Annexes C, D, E, F, and G, [and K] are simulated as they are, are NULL AND VOID AB
INITIO because

43
a)

Firstly, there was no actual valid consideration for the deeds of sale xxx over the properties in litis;

b)
Secondly, assuming that there was consideration in the sums reflected in the questioned deeds, the properties
are more than three-fold times more valuable than the measly sums appearing therein;
c)

Thirdly, the deeds of sale do not reflect and express the true intent of the parties (vendors and vendees); and

d)
Fourthly, the purported sale of the properties in litis was the result of a deliberate conspiracy designed to
unjustly deprive the rest of the compulsory heirs (plaintiffs herein) of their legitime.
- XXI Necessarily, and as an inevitable consequence, Transfer Certificates of Title Nos. 36113/T-172, S-109772, 155329,
155330, 157203 [and 157779] issued by the Registrar of Deeds over the properties in litis xxx are NULL AND
VOID AB INITIO.
Defendants, on the other hand aver (1) that plaintiffs do not have a cause of action against them as well as the
requisite standing and interest to assail their titles over the properties in litis; (2) that the sales were with sufficient
considerations and made by defendants parents voluntarily, in good faith, and with full knowledge of the
consequences of their deeds of sale; and (3) that the certificates of title were issued with sufficient factual and legal
basis.[4] (Emphasis in the original)
The Ruling of the Trial Court
Before the trial, the trial court ordered the dismissal of the case against defendant spouses Gavino Joaquin and Lea
Asis.[5] Instead of filing an Answer with their co-defendants, Gavino Joaquin and Lea Asis filed a Motion to Dismiss.
[6]
In granting the dismissal to Gavino Joaquin and Lea Asis, the trial court noted that compulsory heirs have the right
to a legitime but such right is contingent since said right commences only from the moment of death of the decedent
pursuant to Article 777 of the Civil Code of the Philippines. [7]
After trial, the trial court ruled in favor of the defendants and dismissed the complaint. The trial court stated:
In the first place, the testimony of the defendants, particularly that of the xxx father will show that the Deeds of Sale
were all executed for valuable consideration. This assertion must prevail over the negative allegation of plaintiffs.
And then there is the argument that plaintiffs do not have a valid cause of action against defendants since there can
be no legitime to speak of prior to the death of their parents. The court finds this contention tenable. In determining
the legitime, the value of the property left at the death of the testator shall be considered (Art. 908 of the New Civil
Code). Hence, the legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs
therefore cannot claim an impairment of their legitime while their parents live.
All the foregoing considered, this case is DISMISSED.
In order to preserve whatever is left of the ties that should bind families together, the counterclaim is likewise
DISMISSED.
No costs.
SO ORDERED.[8]
The Ruling of the Court of Appeals
The Court of Appeals affirmed the decision of the trial court. The appellate court ruled:
To the mind of the Court, appellants are skirting the real and decisive issue in this case, which is, whether xxx they
have a cause of action against appellees.
Upon this point, there is no question that plaintiffs-appellants, like their defendant brothers and sisters, are
compulsory heirs of defendant spouses, Leonardo Joaquin and Feliciana Landrito, who are their parents. However,
their right to the properties of their defendant parents, as compulsory heirs, is merely inchoate and vests only upon
the latters death. While still alive, defendant parents are free to dispose of their properties, provided that such
dispositions are not made in fraud of creditors.
Plaintiffs-appellants are definitely not parties to the deeds of sale in question. Neither do they claim to be creditors of
their defendant parents. Consequently, they cannot be considered as real parties in interest to assail the validity of

44
said deeds either for gross inadequacy or lack of consideration or for failure to express the true intent of the
parties. In point is the ruling of the Supreme Court in Velarde, et al. vs. Paez, et al., 101 SCRA 376, thus:
The plaintiffs are not parties to the alleged deed of sale and are not principally or subsidiarily bound thereby; hence,
they have no legal capacity to challenge their validity.
Plaintiffs-appellants anchor their action on the supposed impairment of their legitime by the dispositions made by their
defendant parents in favor of their defendant brothers and sisters. But, as correctly held by the court a quo, the
legitime of a compulsory heir is computed as of the time of the death of the decedent. Plaintiffs therefore cannot
claim an impairment of their legitime while their parents live.
With this posture taken by the Court, consideration of the errors assigned by plaintiffs-appellants is inconsequential.
WHEREFORE, the decision appealed from is hereby AFFIRMED, with costs against plaintiffs-appellants.
SO ORDERED.[9]
Hence, the instant petition.
Issues
Petitioners assign the following as errors of the Court of Appeals:
1. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE IN QUESTION HAD NO
VALID CONSIDERATION.
2. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT EVEN ASSUMING THAT THERE WAS A
CONSIDERATION, THE SAME IS GROSSLY INADEQUATE.
3. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE DEEDS OF SALE DO NOT EXPRESS THE
TRUE INTENT OF THE PARTIES.
4. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE CONVEYANCE WAS PART AND PARCEL OF
A CONSPIRACY AIMED AT UNJUSTLY DEPRIVING THE REST OF THE CHILDREN OF THE SPOUSES
LEONARDO JOAQUIN AND FELICIANA LANDRITO OF THEIR INTEREST OVER THE SUBJECT PROPERTIES.
5. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONERS HAVE A GOOD, SUFFICIENT AND
VALID CAUSE OF ACTION AGAINST THE PRIVATE RESPONDENTS.[10]
The Ruling of the Court
We find the petition without merit.
We will discuss petitioners legal interest over the properties subject of the Deeds of Sale before discussing the issues
on the purported lack of consideration and gross inadequacy of the prices of the Deeds of Sale.
Whether Petitioners have a legal interest
over the properties subject of the Deeds of Sale
Petitioners Complaint betrays their motive for filing this case. In their Complaint, petitioners asserted that the
purported sale of the properties in litis was the result of a deliberate conspiracy designed to unjustly deprive the rest
of the compulsory heirs (plaintiffs herein) of their legitime. Petitioners strategy was to have the Deeds of Sale
declared void so that ownership of the lots would eventually revert to their respondent parents. If their parents die still
owning the lots, petitioners and their respondent siblings will then co-own their parents estate by hereditary
succession.[11]
It is evident from the records that petitioners are interested in the properties subject of the Deeds of Sale, but they
have failed to show any legal right to the properties. The trial and appellate courts should have dismissed the action
for this reason alone. An action must be prosecuted in the name of the real party-in-interest. [12]
[T]he question as to real party-in-interest is whether he is the party who would be benefitted or injured by the
judgment, or the party entitled to the avails of the suit.
xxx

45
In actions for the annulment of contracts, such as this action, the real parties are those who are parties to the
agreement or are bound either principally or subsidiarily or are prejudiced in their rights with respect to one of the
contracting parties and can show the detriment which would positively result to them from the contract even though
they did not intervene in it (Ibaez v. Hongkong & Shanghai Bank, 22 Phil. 572 [1912]) xxx.
These are parties with a present substantial interest, as distinguished from a mere expectancy or future, contingent,
subordinate, or consequential interest. The phrase present substantial interest more concretely is meant such
interest of a party in the subject matter of the action as will entitle him, under the substantive law, to recover if the
evidence is sufficient, or that he has the legal title to demand and the defendant will be protected in a payment to or
recovery by him.[13]
Petitioners do not have any legal interest over the properties subject of the Deeds of Sale. As the appellate court
stated, petitioners right to their parents properties is merely inchoate and vests only upon their parents death. While
still living, the parents of petitioners are free to dispose of their properties. In their overzealousness to safeguard their
future legitime, petitioners forget that theoretically, the sale of the lots to their siblings does not affect the value of their
parents estate. While the sale of the lots reduced the estate, cash of equivalent value replaced the lots taken from
the estate.
Whether the Deeds of Sale are void
for lack of consideration
Petitioners assert that their respondent siblings did not actually pay the prices stated in the Deeds of Sale to their
respondent father. Thus, petitioners ask the court to declare the Deeds of Sale void.
A contract of sale is not a real contract, but a consensual contract. As a consensual contract, a contract of sale
becomes a binding and valid contract upon the meeting of the minds as to price. If there is a meeting of the minds of
the parties as to the price, the contract of sale is valid, despite the manner of payment, or even the breach of that
manner of payment. If the real price is not stated in the contract, then the contract of sale is valid but subject to
reformation. If there is no meeting of the minds of the parties as to the price, because the price stipulated in the
contract is simulated, then the contract is void.[14] Article 1471 of the Civil Code states that if the price in a contract of
sale is simulated, the sale is void.
It is not the act of payment of price that determines the validity of a contract of sale. Payment of the price has nothing
to do with the perfection of the contract. Payment of the price goes into the performance of the contract. Failure to
pay the consideration is different from lack of consideration. The former results in a right to demand the fulfillment or
cancellation of the obligation under an existing valid contract while the latter prevents the existence of a valid contract.
[15]

Petitioners failed to show that the prices in the Deeds of Sale were absolutely simulated. To prove simulation,
petitioners presented Emma Joaquin Valdozs testimony stating that their father, respondent Leonardo Joaquin, told
her that he would transfer a lot to her through a deed of sale without need for her payment of the purchase price.
[16]
The trial court did not find the allegation of absolute simulation of price credible. Petitioners failure to prove
absolute simulation of price is magnified by their lack of knowledge of their respondent siblings financial capacity to
buy the questioned lots.[17] On the other hand, the Deeds of Sale which petitioners presented as evidence plainly
showed the cost of each lot sold. Not only did respondents minds meet as to the purchase price, but the real price
was also stated in the Deeds of Sale. As of the filing of the complaint, respondent siblings have also fully paid the
price to their respondent father.[18]
Whether the Deeds of Sale are void
for gross inadequacy of price
Petitioners ask that assuming that there is consideration, the same is grossly inadequate as to invalidate the Deeds of
Sale.
Articles 1355 of the Civil Code states:
Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless
there has been fraud, mistake or undue influence. (Emphasis supplied)
Article 1470 of the Civil Code further provides:

46
Art. 1470. Gross inadequacy of price does not affect a contract of sale, except as may indicate a defect in the
consent, or that the parties really intended a donation or some other act or contract. (Emphasis supplied)
Petitioners failed to prove any of the instances mentioned in Articles 1355 and 1470 of the Civil Code which would
invalidate, or even affect, the Deeds of Sale. Indeed, there is no requirement that the price be equal to the exact
value of the subject matter of sale. All the respondents believed that they received the commutative value of what
they gave. As we stated inVales v. Villa:[19]
Courts cannot follow one every step of his life and extricate him from bad bargains, protect him from unwise
investments, relieve him from one-sided contracts, or annul the effects of foolish acts. Courts cannot constitute
themselves guardians of persons who are not legally incompetent. Courts operate not because one person has been
defeated or overcome by another, but because he has been defeated or overcome illegally. Men may do foolish
things, make ridiculous contracts, use miserable judgment, and lose money by them indeed, all they have in the
world; but not for that alone can the law intervene and restore. There must be, in addition, aviolation of the law, the
commission of what the law knows as an actionable wrong, before the courts are authorized to lay hold of the
situation and remedy it. (Emphasis in the original)
Moreover, the factual findings of the appellate court are conclusive on the parties and carry greater weight when they
coincide with the factual findings of the trial court. This Court will not weigh the evidence all over again unless there
has been a showing that the findings of the lower court are totally devoid of support or are clearly erroneous so as to
constitute serious abuse of discretion.[20] In the instant case, the trial court found that the lots were sold for a valid
consideration, and that the defendant children actually paid the purchase price stipulated in their respective Deeds of
Sale. Actual payment of the purchase price by the buyer to the seller is a factual finding that is now conclusive upon
us.
WHEREFORE, we AFFIRM the decision of the Court of Appeals in toto.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-27113 November 19, 1974

SABINA BASA, BONIFACIO BASA, BONIFACIO CABALHIN and PRIMITIVO GALLARDO, plaintiffs-appellees,
vs.
FEDERACION OBRERA DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF)
and LA DICHA LA PAZ Y BUEN VIAJE CIGAR AND CIGARETTE FACTORY defendants. FEDERACION OBRERA
DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF), defendant-appellant.
ANTONIO, J.:p
Appeal from the decision, dated March 31, 1966, of the Court of First Instance, Branch IV, Quezon City, (1) enjoining
defendant La Dicha La Paz y Buen Viaje Cigar and Cigarette Factory from dismissing plaintiffs-appellees Sabina
Basa, Bonifacio Basa, Bonifacio Cabalhin and Primitivo Gallardo from their employment in said company; and (2)
ordering both the company and defendant-appellant Federacion Obrera de la Industria Tabaquera y Otros
Trabajadores de Filipinos(FOITAF) to reimburse all union dues and assessments collected from plaintiffs-appellees
from the date of their resignation as members in defendant union until the date of the last collection, to pay attorney's
fees in the amount of P900.00 and the costs of suit.
The records show that plaintiffs-appellees Sabina Basa, Bonifacio Basa, Bonifacio Cabalhin and Primitivo Gallardo,
who are members of "Iglesia ni Cristo", have been employed with the defendant company, La Dicha La Paz y Buen
Viaje Cigar and Cigarette Factory, since 1949, 1952, 1960 and 1957, respectively, and were therefore employees of
that company on April 21, 1961, when the collective bargaining contract between the company and the defendant
union, Federacion Obrera de la Industria Tabaquera y Otros Trabajadores de Filipinas (FOITAF) was executed. This
agreement provided for a union shop clause, thus:

47
RECOGNITION AND UNION SECURITY: (2) All workers and laborers who are members of the FOITAF shall remain
and maintain their membership in good standing in the Union as a condition of their continued employment with the
Company. New workers whom the Management may employ shall, as a condition of continued employment with the
company, become members of the FOITAF after 60 working days of continuous employment.
The plaintiffs-appellees were members in good standing of the labor union until August 28, 1964, when they formally
resigned from the Union (Annex "A", Complaint), invoking their constitutional right to freedom of religion, the free
exercise of which exempts them from being compelled to join any labor organization, when such is contrary to their
religious beliefs and convictions, as provided by Republic Act No. 3350, 1 which became a law on June 18, 1961. In its
answer dated August 31, 1964, to the resignation of the plaintiffs-appellees (Annex "B", ibid.), the Union, through its
president Severino Tabalno, gave them fifteen (15) days from receipt of said letter to reconsider their resignation,
otherwise it would ask the Company to enforce the above-quoted union shop agreement. Thereafter, or on October
14, 1964, the Company, through its president Bienvenido A. Tan, Jr., formally gave the plaintiffs-appellees up to
October 23, 1964 within which to re-affiliate with the Union on pain of dismissal (Annex "C", ibid.). Instead of
reconsidering their resignation, the plaintiffs-appellees filed on October 20, 1964 the present action for injunction,
which was amended on January 30, 1965, alleging, among others, that (1) they have a right to remain in their
employment, which is properly within the meaning of constitutional guarantees, 2 for they cannot be legally dismissed
by defendant Company for failing to maintain their membership in the defendant Union, being old employees of the
former; 3 (2) their resignation from the labor Union is but an exercise of their right to freedom of religion guaranteed by
the Constitution, which guarantee is implemented by Republic Act No. 3350; and (3) being no longer members of the
labor Union, they were no longer obliged to pay said dues and assessments through payroll deductions; 4 Plaintiffsappellees, therefore, prayed that judgment be rendered (1) to enjoin immediately ex-parte the defendants from
dismissing plaintiffs from their employment, and from collecting union dues and assessments through payroll
deduction from plaintiffs' earned wages; (2) to order defendants to reimburse, jointly and severally, all union dues and
assessments collected from plaintiffs since their resignation from defendant Union and to pay moral and exemplary
damages, attorney's fees of P900.00 and costs.
Both defendants filed their respective answers. In its answer with special and affirmative defenses, dated November
13, 1964, defendant Company averred, among others, that (1) there is an existing working agreement between
defendant Union and defendant Company providing for a "Closed shop"; (2) plaintiffs resigned from the Union; (3)
defendant Union insists that defendant Company comply with the contract recognizing a closed shop; and (4) if
defendant Company does not comply with the collective bargaining agreement with the Union, it will be subjected to a
suit for damages or risk the possibility of a strike for violation of the collective bargaining agreement. Defendant
Company then prayed that plaintiffs and defendant Union be required to interplead their respective cases and that
judgment be rendered in favor of whomsoever is entitled to just relief as may be proper under the circumstances.
Defendant-appellant Union, in its amended answer with affirmative and special defenses, dated March 26, 1965, to
the amended complaint, alleged, among others, that the plaintiffs are covered by the collective bargaining contract as
Republic Act No. 3350 under which they seek exemption from membership in the Union, is unconstitutional for it (1)
impairs the obligations of contracts (Sec. 1[10], Art. III, 1935 Constitution); (2) denies to workers the right to equal
protection of the laws (Sec. 1[1], Art. III, id.); (3) abridges the freedom of workers to form associations (Sec. 1[6], Art.
III, id.); and (4) contravenes the constitutional mandate that the State shall afford protection to labor (Sec. 6, Art. XIV,
id.); and that this Act was declared unconstitutional by the Court of Industrial Relations in the case of National Labor
Union vs. Hacienda Luisita, et al., Case No. 49-IPA. Defendant-appellant Union then prayed that the complaint be
dismissed.
Subsequently, or on March 31, 1966, the lower court rendered the aforementioned decision. From the aforesaid
decision, defendant Union has appealed to this Court, contending that the lower court erred in not declaring Republic
Act No. 3350 as unconstitutional, reiterating the arguments it advanced before the court a quo.
We find the appeal to be without merit.
To begin with, House Bill No. 5859, which later became Republic Act No. 3350, was enacted into law with the explicit
purpose of safeguarding and maintaining inviolate the religious freedom of all individuals. 5
In this appeal, appellant labor union contends that Republic Act No. 3350 is violative of the fundamental charter, as
(a) it infringes on the constitutional bar against a law respecting an establishment of religion or a religious test for the
exercise of civil and political rights (Sec. 1[7] of Article III, 1935 Constitution, (b) impairs the obligation of contracts
(Sec. 1[10], Art. III, id.), (c) denies the equal, protection of the laws (Sec. 1[1], Art. III, id.), (d) abridges the freedom to
form associations not contrary to law (Sec. 1[6], Art. III, id.), and (e) impairs the constitutional mandate that the State
shall afford protection to labor (Sec. 5, Art. III; Sec. 6, Art. XIV, id.).
Recently, in Benjamin Victoriano Elizalde Rope Workers' Union, et al., 6 a unanimous Court sustained the
constitutionality of Republic Act No. 3350. In rejecting the arguments advanced by appellant labor union, imputing to
said statute alleged constitutional infirmities similar to those now asserted by the defendant-appellant in the case at
bar, We declared:

48
Both the Constitution and Republic Act No. 875 recognized freedom of association. Section 1[6] of Article III of the
Constitution of 1935, as well as Section 7 of Article IV of the Constitution of 1973, provide that the right to form
associations or societies for purposes not contrary to law shall not be abridged. Section 3 of Republic Act No. 875
provides that employees shall have the right to self-organization and to form, join or assist labor organizations of their
own choosing for the purpose of collective bargaining and to engage in concerted activities for the purpose of
collective bargaining and other mutual aid or protection. What the Constitution and the Industrial Peace Act recognize
and guarantee is the "right" to form or join associations. Notwithstanding the different theories propounded by the
different schools of jurisprudence regarding the nature and contents of a "right", it can be safely said that whatever
theory one subscribes to, a right comprehends at least two broad notions, namely: first, liberty or freedom, i.e., the
absence of legal restraint, whereby an employee may act for himself without being prevented by law; and second,
power, whereby an employee may, as he pleases, join or refrain from joining an association. It is, therefore, the
employee who should decide for himself whether he should join or not an association; and should he choose to join,
he himself makes up his mind as to which association he would join; and even after he has joined, he still retains the
liberty and the power to leave and cancel his membership with said organization at any time. It is clear, therefore, that
the right to join a union includes the right to abstain from joining any union. Inasmuch as what both the Constitution
and the Industrial Peace Act have recognized, and guaranteed to the employee, is the "right" to join associations of
his choice, it would be absurd to say that the law also imposes, in the same breath, upon the employee the duty to
join associations. The law does not enjoin an employee to sign up with any association.
The right to refrain from joining labor organizations recognized by Section 3 of the Industrial Peace Act is, however,
limited. The legal protection granted to such right to refrain from joining is withdrawn by operation of law, where a
labor union and an employer have agreed on a closed shop, by virtue of which the employer may employ only
members of the collective bargaining union, and the employees must continue to be members of the union for the
duration of the contract in order to keep their jobs. Thus Section 4[a] (4) of the Industrial Peace Act, before its
amendment by Republic Act No. 3350, provides that although it would be an unfair labor practice for an employer "to
discriminate in regard to hire or tenure of employment or any term or condition of employment to encourage or
discouraged membership in any labor organization" the employer is, however, not precluded "from making an
agreement with a labor organization to require as a condition of employment membership therein, if such labor
organization is the representative of the employees". By virtue, therefore, of a closed shop agreement, before the
enactment of Republic Act No. 3350, if any person, regardless of his religious beliefs, wishes to be employed or to
keep his employment, he must become a member of the collective bargaining union. Hence, the right of said
employee not to join the labor union is curtailed and withdrawn.
To that all-embracing coverage of the closed shop arrangement, Republic Act No. 3350 introduced an exception,
when it added to Section 4[al (4) of the Industrial Peace Act the following proviso: "but such agreement shall not cover
members of any religious sects which prohibit affiliation of their members in any such labor organization". Republic
Act No. 3350 merely excludes ipso jure from the application and coverage of the closed shop agreement the
employees belonging to any religious sects which prohibit affiliation of their members with any labor organization.
What the exception provides, therefore, is that members of said religious sects cannot be compelled or coerced to
join labor unions even when said unions have closed shop agreements with the employers; that in spite of any closed
shop agreement, members of said religious sects cannot be refused employment or dismissed from their jobs on the
sole ground that they are not members of the collective bargaining union. It is clear, therefore, that the assailed Act,
far from infringing the constitutional provision on freedom of association, upholds and reinforces it. It does not prohibit
the members of said religious sects from affiliating with labor unions. It still leaves to said members the liberty and the
power to affiliate, or not to affiliate, with labor unions. If, notwithstanding their religious beliefs, the members of said
religious sects prefer to sign up with the labor union, they can do so. If in deference and fealty to their religious faith,
they refuse to sign up, they can do so; the law does not coerce them to join; neither does the law prohibit them from
joining; and neither may the employer or labor union compel them to join. Republic Act No. 3350, therefore, does not
violate the constitutional provision on freedom of association.
2. Appellant Union also contends that the Act is unconstitutional for impairing the obligation of its contract, specifically,
the "union security clause" embodied in its Collective Bargaining Agreement with the Company, by virtue of which
"membership in the union was required as a condition for employment for all permanent employees workers". This
agreement was already in existence at the time Republic Act No. 3350 was enacted on June 18, 1961, and it cannot,
therefore, be deemed to have been incorporated into the agreement. But by reason of this amendment, Appellee, as
well as others similarly situated, could no longer be dismissed from his job even if he should cease to be a member,
or disaffiliate from the Union, and the Company could continue employing him notwithstanding his disaffiliation from
the Union. The Act, therefore, introduced a change into the express terms of the union security clause; the Company
was partly absolved by law from the contractual obligation it had with the Union of employing only Union members in
Permanent Positions. It cannot be denied, therefore, that there was indeed an impairment of said union security
clause. .
xxx xxx xxx
"It should not be overlooked, however, that the prohibition to impair the obligation of contracts is not absolute and
unqualified. The prohibition is general, affording a broad outline and requiring construction to fill in the details. The
prohibition is not to be read with literal exactness like a mathematical formula, for it prohibits unreasonable
impairment only. In spite of the constitutional prohibition, the State continues to possess authority to safeguard the

49
vital interests of its people. Legislation appropriate to safeguarding said interests may modify or abrogate contracts
already in effect. For not only are existing laws read into contracts in order to fix the obligations as between the
parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the
legal order. All contracts made with reference to any matter that is subject to regulation under the police power must
be understood as made in reference to the possible exercise of that power. Otherwise, important and valuable
reforms may be precluded by the simple device of entering into contracts for the purpose of doing that which
otherwise may be prohibited. The policy of protecting contracts against impairment presupposes the maintenance of a
government by virtue of which contractual relations are worthwhile a government which retains adequate authority
to secure the peace and good order of society. The contract clause of the Constitution must, therefore, be not only in
harmony with, but also in subordination to, in appropriate instances, the reserved power of the state to safeguard the
vital interests of the people. It follows that not all legislations, which have the effect of impairing a contract are
obnoxious to the constitutional prohibition as to impairment, and a statute passed in the legitimate exercise of police
power, although it incidentally destroys existing contract rights, must be upheld by the courts. This has special
application to contracts regulating relations between capital and labor which are not merely contractual, and said
labor contracts, for being impressed with public interest, must yield to the common good.
xxx xxx xxx
In order to determine whether legislation unconstitutionally impairs contract obligations, no unchanging yardstick,
applicable at all times and under all circumstances, by which the validity of each statute may be measured or
determined, has been fashioned, but every case must be determined upon its own circumstances. Legislation
impairing the obligation of contracts can be sustained when it is enacted for the promotion of the general good of the
people, and when the means adopted to secure that end are reasonable. Both the end sought and the means
adopted must be legitimate, i.e., within the scope of the reserved power of the state construed in harmony with the
constitutional limitation of that power.
What then was the purpose sought to be achieved by Republic Act No. 3350? Its purpose was to insure freedom of
belief and religion, and to promote the general welfare by; preventing discrimination against those members of
religious sects which prohibit their members from joining labor unions, confirming thereby their natural statutory and
constitutional right to work, the fruits of which work are usually the only means whereby they can maintain their own
life and the life of their dependents. It cannot be gainsaid that said purpose is legitimate.
The questioned Act also provides protection to members of said religious sects against two aggregates of group
strength from which the individual needs protection. The individual, employee, at various times in his working life, is
confronted by two aggregates of power collective labor directed by a union, and collective capital, directed by
management. The union, an institution develop to organize labor into a collective force and thus protect the individual
employee from the power of collective capital, is, paradoxically, both the champion of employee rights, and a new
source of their frustration. Moreover, when the Union interacts with management, it produces yet a third aggregate of
group strength from which the individual also needs protection the collective bargaining relationship.
It may not be amiss to point out here that the free exercise of religious profession or belief is superior to contract
rights. In case of conflict, the latter must, therefore, yield to the former. The Supreme Court of the United States has
also declared on several occasions that the rights in the First Amendment, which include freedom of religion, enjoy a
preferred position in the constitutional system. Religious freedom, although not unlimited, is a fundamental personal
right and liberty, and has a preferred position in the hierarchy of values. Contractual rights, therefore, must yield to
freedom of religion. It is only where unavoidably necessary to prevent an immediate and grave danger to the security
and welfare of the community that infringement of religious freedom may be justified, and only to the smallest extent
necessary to avoid the danger.
3. In further support of its contention that Republic Act No. 3350 is unconstitutional, appellant Union averred that said
Act discriminates in favor of members of said religious sects in violation of Section 1[7] of Article III of the 1935
Constitution, and which is now Section 8 of Article IV of the 1973 Constitution, which provides:
No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof, and the free
exercise and enjoyment of religious profession and worship, without discrimination and preference, shall forever be
allowed. No religious test shall be required for the exercise of civil or political rights.
The constitutional provision not only prohibits legislation for the support of any religious tenets or the modes of
worship of any sect, thus forestalling compulsion by law of the acceptance of any creed or the practice of any form of
worship, but also assures the free exercise of one's chosen form of religion within limits of utmost amplitude. It has
been said that the religion clauses of the Constitution are all designed to protect the broadest possible liberty of
conscience, to allow each man to believe as his conscience directs, to profess his beliefs, and to live as he believes
he ought to live, consistent with the liberty of others and with the common good. Any legislation whose effect or
purpose is to impede the observance of one or all religions, or to discriminate inviciously between the religions, is
invalid, even though the burden may be characterized as being only indirect. But if the state regulates conduct by
enacting, within its power, a general law which has for its purpose and effect to advance the state's secular goals, the

50
statute is valid despite its indirect burden on religious observance, unless the state can accomplish its purpose
without imposing such burden.
In Aglipay v. Ruiz, this Court had occasion to state that the government precluded from pursuing valid objectives
secular in character even if the incidental result would be favorable to a religion or sect. It has likewise been held that
the statute, in order to withstand the strictures of constitutional prohibition, must have a secular legislative purpose
and a primary effect that neither advances nor inhibits religion. Assessed by these criteria, Republic Act No. 3350
cannot be said to violate the constitutional inhibition of the "no establishment" (of religion) clause of the Constitution.
The purpose of Republic Act No. 3350 is secular, wordly, and temporal, not spiritual or religious or holy and eternal. It
was intended to serve the secular purpose of advancing the constitutional right to the free exercise of religion, by
averting that certain persons be refused work, or be dismissed from work, or be dispossessed of their right to work
and of being impeded to pursue a modest means of livelihood, by reason of union security agreements. To help its
citizens to find gainful employment whereby they can make a living to support themselves and their families is a valid
objective of the state. In fact, the state is enjoined, in the 1935 Constitution, to afford protection to labor, and regulate
the relations between labor and capital and industry. More so now in the 1973 Constitution where it is mandated that
"the State shall afford protection to labor, promote full employment and equality in employment, ensure equal work
opportunities regardless of sex, race or creed and regulate the relation between workers and employers.
The primary effects of the exemption from closed shop agreements in favor of members of religious sects that prohibit
their members from affiliating with a labor organization, is the protection of said employees against the aggregate
force of the collective bargaining agreement, and relieving certain citizens of a burden on their religious beliefs; and
by eliminating to a certain extent economic insecurity due to unemployment, which is a serious menace to the health,
morals, and welfare of the people of the State, the Act also promotes the well-being of society. It is our view that the
exemption from the effects of closed shop agreement does not directly advance, or diminish, the interests of any
particular religion. Although the exemption may benefit those who are members of religious sects that prohibit their
members from joining labor unions, the benefit upon the religious sects is merely incidental and indirect. The
"establishment clause" (of religion) does not ban regulation on conduct whose reason or effect merely happens to
coincide or harmonize with the tenets of some or all religions. The free exercise clause of the Constitution has been
interpreted to require that religious exercise be preferentially aided.
We believe that in enacting Republic Act No. 3350, Congress acted consistently with the spirit of the constitutional
provision. It acted merely to relieve the exercise of religion, by certain persons, of a burden that is imposed by union
security agreements. It was Congress itself that imposed that burden when it enacted the Industrial Peace Act
(Republic Act 875), and, certainly, Congress, if it so deems advisable, could take away the same burden. It is certain
that not every conscience can be accomodated by all the laws of the land; but when general laws conflict with
scrupples of conscience, exemptions ought to be granted unless some "compelling state interest" intervenes. In the
instant case, We see no such compelling state interest to withhold the exemption.
Appellant bewails that while Republic Act No. 3350 protects members of certain religious sects, it leaves no right to,
and is silent as to the protection of, labor organizations. The purpose of Republic Act No. 3350 was not to grant rights
to labor unions. The rights of labor unions are amply provided for in Republic Act No. 875 and the new Labor Code.
As to the lamented silence of the Act regarding the rights and protection of labor unions, suffice it to say, first, that the
validity of a statute is determined by its provisions, not by its silence; and, second, the fact that the law may work
hardship does not render it unconstitutional.
It would not be amiss to state, regarding this matter, that to compel persons to join and remain members of a union to
keep their jobs in violation of their religious scrupples, would hurt, rather than help, labor unions. Congress has seen it
fit to exempt religious objectors lest their resistance spread to other workers, for religious objections have contagious
potentialities more than political and philosophic objections.
Furthermore, let it be noted unity and loyalty even to the country, and a fortiorari to a labor union assuming that
such unity and loyalty can be attained through coercion is not a goal that is constitutionally obtainable at the
expense of religious liberty. A desirable end cannot be promoted by prohibited means.
4. Appellant's fourth contention, that Republic Act No. 3350 violates the constitutional prohibition against requiring a
religious test for the exercise of a civil right or a political right, is not well taken. The Act does not require as a
qualification, or condition, for joining any lawful association membership in any particular religion or in any religious
sect; neither does the Act require affiliation with a religious sect that prohibits its members from joining a labor union
as a condition or qualification for withdrawing from a labor union. Joining or withdrawing from a labor union requires a
positive act. Republic Act No. 3350 only exempts members with such religious affiliation from the coverage of closed
shop agreements. So, under this Act, a religious objector is not required to do a positive act to exercise the right to
join or to resign from the union. He is exempted ipso jure without need of any positive act on his part. A conscientious
religious objector need not perform a positive act or exercise the right of resigning from the labor union he is
exempted from the coverage of any closed shop agreement that a labor union may have entered into. How then can
there be a religious test required for the exercise of a right when no right need be exercised?

51
xxx xxx xxx
5. Appellant avers as its fifth ground that Republic Act No. 3350 is a discriminatory legislation, inasmuch as it grants to
the members of certain religious sects undue advantages over other workers, thus violating Section 1 of Article III of
the 1935 Constitution which forbids the denial to any person of the equal protection of the laws.
The guaranty of equal protection of the laws is not a guaranty of equality in the application of the laws upon all
citizens of the state. It is not, therefore, a requirement, in order to avoid the constitutional prohibition against
inequality, that every man, woman and child should be affected alike by a statute. Equality of operation of statutes
does not mean indiscriminate operation on persons merely as such, but on persons according to the circumstances
surrounding them. It guarantees equality, not identity of rights. The Constitution does not require that things which are
different in fact be treated in law as though they were the same. The equal protection clause does not forbid
discrimination as to things that are different. It does not prohibit legislation which is limited either in the object to which
it is directed or by the territory within which it is to operate.
The equal protection of the laws clause of the Constitution allows classification. Classification in law, as in the other
departments of knowledge or practice, is the grouping of things in speculation or practice because they agree with
one another in certain particulars. A law is not invalid because of simple inequality. The very idea of classification is
that of inequality, so that it goes without saying that the mere fact of inequality in no manner determines the matter of
constitutionality. All that is required of a valid classification is that it be reasonable, which means that the classification
should be based on substantial distinctions which make for real differences; that it must be germane to the purpose of
the law; that it must not be limited to existing conditions only; and that it must apply equally to each member of the
class. This Court has held that the standard is satisfied if the classification or distinction is based on a reasonable
foundation or rational basis and is not palpably arbitrary.
In the exercise of its power to make classifications for the purpose of enacting laws over matters within its jurisdiction,
the state is recognized as enjoying a wide range of discretion. It is not necessary that the classification be based on
scientific or marked differences of things or in their relation. Neither is it necessary that the classification be made with
mathematical nicety. Hence legislative classification may in many cases properly rest on narrow distinctions, for the
equal protection guaranty does not preclude the legislature from recognizing degrees of evil or harm, and legislation
is addressed to evils as they may appear.
We believe that Republic Act No. 3350 satisfies the aforementioned requirements. The Act classifies employees and
workers, as to the effect and coverage of union shop security agreements, into those who by reason of their religious
beliefs and convictions cannot sign up with a labor union, and those whose religion does not prohibit membership in
labor unions. The classification rests on real or substantial, not merely imaginary or whimsical, distinctions. There is
such real distinction in the beliefs, feelings and sentiments of employees. Employees do not believe in the same
religious faith and different religions differ in their dogmas and canons. Religious beliefs, manifestations and
practices, though they are found in all places, and in all times, take so many varied forms as to be almost beyond
imagination. There are many views that comprise the broad spectrum of religious beliefs among the people. There
are diverse manners in which beliefs, equally paramount in the lives of their possessors, may be articulated. Today
the country is far more heterogenous in religion than before, differences in religion do exist, and these differences are
important and should not be ignored.
Even from the psychological point of view, the classification is based on real and important differences. Religious
beliefs are not mere beliefs, mere ideas existing only in the mind, for they carry with them practical consequences and
are the motives of certain rules of human conduct and the justification of certain acts. Religious sentiment makes a
man view things and events in their relation to his God. It gives to human life its distinctive character, its tone, its
happiness, or unhappiness, its enjoyment or irksomeness. Usually, a strong and passionate desire is involved in a
religious belief. To certain persons, no single factor of their experience is more important to them than their religion, or
their not having any religion. Because of differences in religious belief and sentiments, a very poor person may
consider himself better than the rich, and the man who even lacks the necessities of life may be more cheerful than
the one who has all possible luxuries. Due to their religious beliefs people, like the martyrs, became resigned to the
inevitable and accepted cheerfully even the most painful and excruciating pains. Because of differences in religious
beliefs, the world has witnessed turmoil, civil strife, persecution, hatred, bloodshed and war, generated to a large
extent by members of sects who were intolerant of other religious beliefs. The classification, introduced by Republic
Act No. 3350, therefore, rests on substantial distinctions.
The classification introduced by said Act is also germane to its purpose. The purpose of the law is precisely to avoid
those who cannot, because of their religious belief, join labor unions, from being deprived of their right to work and
from being dismissed from their work because of union shop security agreements.
xxx xxx xxx
6. Appellant's further contention that Republic Act No. 3350 violates the constitutional provision on social justice is
also baseless. Social justice is intended to promote the welfare of all the people. Republic Act No. 3350 promotes that
welfare insofar as it looks after the welfare of those who, because of their religious belief, cannot join labor unions; the

52
Act prevents their being deprived of work and of the means of livelihood. In determining whether any particular
measure is for public advantage, it is not necessary that the entire state be directly benefited it is sufficient that a
portion of the state be benefited thereby.
Social justice also means the adoption by the Government of measures calculated to insure economic stability of all
component elements of society, through the maintenance of a proper economic and social equilibrium in the interrelations of the members of the community. Republic Act No. 3350 insures economic stability to the members of a
religious sect, like the Iglesia ni Cristo, who are also component elements of society, for it insures security in their
employment, notwithstanding their failure to join a labor union having a closed shop agreement with the employer.
The Act also advances the proper economic and social equilibrium between labor unions and employees who cannot
join labor unions, for it exempts the latter from the compelling necessity of joining labor unions that have closed shop
agreements, and equalizes, in so far as opportunity to work is concerned, those whose religion prohibits membership
in labor unions with those whose religion does not prohibit said membership. Social justice does not imply social
equality, because social inequality will always exist as long as social relations depend on personal or subjective
proclivities. Social justice does not require legal equality because legal equality, being a relative term, is necessarily
premised on differentiations based on personal or natural conditions. Social justice guarantees equality of opportunity,
and this is precisely what Republic Act No. 3350 proposes to accomplish it gives laborers, irrespective of their
religious scrupples, equal opportunity for work.
xxx xxx xxx
As comprehensively observed by Justice Fernando in his concurring opinion in that case:
3. There is, however, the question of whether such an exception possesses an implication that lessens the
effectiveness of state efforts to protect labor, likewise, as noted, constitutionally ordained. Such a view, on the surface,
may not be lacking in plausibility, but upon closer analysis, it cannot stand scrutiny. Thought must be given to the
freedom of association, likewise an aspect of intellectual liberty. For the late Professor Howe, constitutionalist and in
his lifetime the biographer of the great Holmes, it even partakes of the political theory of pluralistic sovereignty. So
great is the respect for the autonomy accorded voluntary societies. Such a right implies at the very least that one can
determine for himself whether or not he should join or refrain from joining a labor organization, an institutional device
for promoting the welfare of the working man. A closed shop, on the other hand, is inherently coercive. That is why, as
is unmistakably reflected in our decisions, the latest of which isGuijarno v. Court of Industrial Relations, it is far from
being a favorite of the law. For a statutory provision then to further curtail its operation, is precisely to follow the
dictates of sound public policy.
Plaintiffs-appellees cannot, therefore, be summarily dismissed from their employment in the defendant Company as a
result of their resignation from the appellant notwithstanding the existence of a union shop clause in the labor union
collective bargaining agreement, as Republic Act No. 3350 exempts them from joining any labor organization, when
such is contrary to their religious beliefs and convictions. We have also previously held that a member of a labor
union may leave and cancel his membership with the union at anytime. When an employee or laborer joins a labor
union, he does not make any commitment or assume an undertaking to continue his membership therein for any fixed
period of time, much less indefinitely. The moment he has resigned or separated from the Union, he is no longer
obliged to pay his dues and assessments to said organization. 7 We find, therefore, no error in the trial court's order,
requiring both the company and defendant-appellant labor Union to reimburse all union dues and assessments
collected from plaintiffs-appellees from the date of their resignations as members of the Union until the date of the last
collection.
WHEREFORE, the appealed decision is hereby affirmed, with costs against the defendant-appellant.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 113363

August 24, 1999

ASIA WORLD RECRUITMENT INC., petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (2nd DIVISION),
PHILIPPINE OVERSEAS EMPLOYMENT ADMINISTRATION (POEA) and PHILIP MEDEL, JR., respondents.
QUISUMBING, J.:

53
This is a special civil action for certiorari under Rule 65 of the Rules of Court assailing (a) the Decision 1 dated
September 13, 1993 of the National Labor Relations Commission (NLRC), Second Division, in NLRC-NCR CA No.
001637-91, which affirmed with modification the decision of the Philippine Overseas Employment Administration
(POEA)2 in POEA Case No. 89-10-1002 finding petitioner liable, among others, for illegal dismissal of private
respondent; and (b) the Resolution 3 of the NLRC, dated December 15, 1993, denying reconsideration.
Petitioner Asia World Recruitment is a domestic corporation with authority granted by the POEA to recruit and deploy
Filipino overseas contract workers abroad. Petitioner's principal is Roan Selection Trust International Ltd., a diamond
and gold mining company in Angola, Africa, owned by one Christian Rudolf G. Hellinger.
Private respondent Philip Medel, Jr., is a Filipino who entered into an employment contract 4 with petitioner to work as
a Security Officer in its diamond mine in Cafunfo, Angola, for a period of twelve (12) months commencing upon his
departure from the Philippines, with a salary rate of US $800.00 a month, plus 50% of the salary by way of bonus or a
total of US$1,200.00 a month. 5 The parties also agreed that private respondent would work for six (6) hours a day,
with one rest day every week and that he would be entitled to overtime pay for work in excess of six (6) hours at the
rate of $5.00 per hour.6 Private respondent arrived in Angola sometime in December, 1988. In addition to being a
Security Officer, he was made to work as a Dispatcher and Metallurgy Inspector in the diamond mine. During his
employment, private respondent elevated the grievances of his Filipino co-workers to the management, 7 which
apparently strained relations between him and management.
On March 10, 1989, private respondent received a letter of termination 8 dated March 1, 1989 signed by General
Manager A.J. Smith, who informed him that the company was not satisfied with his performance within the threemonth trial period, and that his employment with the company would be terminated on March 13, 1989. The records
show, however, that private respondent was repatriated to the Philippines on March 12, 1989, barely two (2) days
after he received the notice of termination.
Aggrieved by his precipitate termination, private respondent filed on October 18, 1989, a complaint 9 for illegal
dismissal, cancellation of petitioner's license, refund of placement fee plus interest, payment of salary differentials,
reimbursement of amounts illegally deducted from his monthly salary, payment of salaries for the unexpired portion of
the contract, damages and attorney's fees against petitioner and its principal, Roan Selection Trust International Ltd.
On March 12, 1991, the POEA Adjudication Office rendered a decision 10 finding petitioner (with his co-respondents
therein) solidarily liable for illegal dismissal, and ordering them to pay herein private respondent the sum of seven
thousand two hundred ($7,200.00) dollars representing salaries for the unexpired portion of the contract, but
disallowing private respondent's other monetary claims. 11
On April 1, 1991, petitioner and private respondent elevated their respective appeals to the NLRC. Petitioner sought
the reversal of the POEA decision, while private respondent filed an Urgent Motion for the Partial Reconsideration of
the POEA decision denying his other monetary claims.
On September 13, 1993, the NLRC, through its Second Division, rendered the assailed decision dismissing
petitioner's appeal and granting private respondent's Partial Motion for Reconsideration as regards his claims for
illegal deductions, salary differentials and overtime pay, finding as follows:
As established from the records, the parties agreed that complainant's basic monthly salary was US $800.00
plus 50% of such salary as bonus or a total of $1,200.00 a month. The bonus represents complainant's
hazard pay. For according to respondents there is a war going on in Angola.
The POEA by denying the complainant's claim for illegal deduction and/or salary differential held that the
respondents has proven that complainant has already been paid were it not for the legal deductions made
against his salaries representing the damages caused to company vehicle by complainant. A careful study of
the record reveals that said deductions on the complainant's salary is not justified considering that
complainant in his position paper was able to establish the fact that he was not negligent in driving his
assigned vehicle but was the subject of sabotage as an attempt to silence him for seeking redress and
elevating the grievances of his co-Filipino workers to the management. It can thus be said that respondent
made it appear that complainant committed a misdemeanor by issuing complainant the misdemeanor
application note wherein he was made to pay for the cost of the repair of vehicle (Record, p. 32).
Furthermore, there is no showing that an investigation was made to establish the liability of complainant
regarding the alleged vehicular accident. Neither was there proof showing that deductions be made from the
salary of the complainant. No less than the Labor Code, Article 116 thereof, provides that "it shall be unlawful
for any person, directly or indirectly withold any amount from the wages of a worker . . . without the worker's
consent."
As shown by the bank records, respondent employer transmitted to complainant's bank account in the
Philippines the total amount of US$2,190.77 (See Records, p. 242) representing complainant's salary during
his entire period of employment. Based on complainant's US $1,200.00 a month salary ($800.00 monthly

54
salary plus 50% thereof as bonus), complainant is supposed to receive $3,600.00. Complainant is therefore
entitled to receive the difference of $1,409.23, as his salary differential.1wphi1.nt
Anent the claim for overtime pay, the same should have been allowed by the POEA in the light of the
evidences/document submitted to wit: Forecast of Duties for February 1989 and March 1989 (Records, pp.
70-71) and the Legend of Forecast of Duties (Records, p. 38). As borne by these documents, complainant,
like other security officers had render (sic) twelve (12) hours of duty per shifting. In the summary of
complainant's Tour of Duties (Records, pp. 116 to 119) it was established that complainant had rendered work
for a total of fifty six (56) days. Considering that he worked for twelve (12) hours each day, complainant has
rendered an excess of six (6) hours of overtime work per day or a total of 336 hours. Based on the prevailing
hourly rate for the overtime work which is $5 per hours, complainant is entitled to US $1,680.00. Under the
circumstances, the documents submitted by complainant in support of his claim for overtime pay are
adequate enough to establish the fact of his overtime work and should have been given credence rather than
respondents' which merely denied the claim without submitting their own evidence to refute. As held by the
Supreme Court in the case of Cuadra vs. NLRC, G.R. No. 98030, March 17, 1992, to wit:
Regarding the claim for overtime pay, we do not agree that it should have been disallowed because of the failure of
the petitioner to substantiate it. . . . .
The claim of our overseas workers against their foreign employers should have not (sic) subjected to the rules of
evidence and procedure that we usually apply to other complainants who have facility in obtaining the required
evidence to prove their demands.
Records show that complainant has engaged the professional services of two (2) lawyers. Pursuant to Article 211 of
the Labor Code and Rule VIII Section II Book III of the Rules Implementing the Labor Code, complainant is entitled to
his claim for attorney's fees.
The NLRC then modified the POEA decision, to wit:
WHEREFORE, the decision of the POEA dated March 12, 1991 is hereby modified as follows:
Respondents are hereby held solidarily liable to pay complainant:
1. The sum of Seven Thousand Two Hundred US Dollars (US$7,200) representing his salaries for the unexpired
portion of his contract.
2. US Dollars One Thousand Six Hundred Eighty (US$1,680.00) as and for complainant's overtime pay.
3. US Dollars One Thousand Four Hundred Nine and Twenty-Three (US$1, 409.23) as salary differential.
4. Attorney's fees, representing 10% of the totality of the amount of the award.
Thereafter, the NLRC, acting on private respondent's Motion for Classificatory Judgment and/or Motion for
Reconsideration, rendered a Decision dated October 29, 1993, clarifying that the aforesaid amounts should be paid at
their prevailing peso equivalent at the time of payment. 12 Petitioner's Motion for Reconsideration of the aforesaid
Decision was likewise denied by the NLRC for lack of merit.
Hence, the instant petition for certiorari, which was given due course by this Court after the private respondent, and
public respondents, through the Office of the Solicitor General, filed their respective Comments, and private
respondent filed his Reply thereto. The parties thereafter submitted their respective Memoranda.
The issue raised in this petition is whether or not public respondent NLRC committed grave abuse of discretion when
it affirmed the decision of the POEA finding that private respondent was illegally dismissed with the modification that
salary differential, overtime pay and attorney's fee should be allowed. 13
During the pendency of the case, by virtue of a writ of execution issued by the NLRC, petitioner made substantial
payments to private respondent in partial satisfaction of the NLRC decision thus prompting private respondent to file a
Motion to Dismiss dated April 20, 1996 and a subsequent Supplemental Motion to Dismiss dated September 19,
1996, stating that;
a. that on October 23, 1993, the NLRC resolution (sic) modified its DECISION (dated September 13, 1993), by
ordering the petitioner Asiaworld to pay him the following:
1. The sum of Seven Thousand Two Hundred US Dollars (US$7,200.00) or its prevailing peso equivalent at the time
of payment representing his salaries for the unexpired portion of his contract.

55
2. US Dollars One Thousand Six Hundred Eighty (US$1,680;00) or its prevailing peso equivalent at the time of
payment as and for complainant's overtime pay.
3. US Dollars One Thousand Four Hundred Nine and Twenty-Three (US$ 1,409.23) or its prevailing peso equivalent
at the time of payment as salary differential.
4. Attorney's fees, representing 10% of the totality of the amount of the award. . . . .
The total award, including attorney's fees, is US $11,318.13.
b. that on April 20, 1996, he filed a MOTION TO DISMISS because of partial payment made by Asiaworld
Recruitment, in the sum of P201,564.13;
c. that on July 26, 1996, the petitioner Asia World Recruitment Inc. paid him the additional sum of US 2,881.69,
subject to his reservation to demand for the balance or the correct computation of the award, per NLRC Resolution
dated 29 October 1993.
d. the prevailing peso equivalent at the time of payment, as of July 26, 1996, was P26.19 x US $1.00. Using the
stated peso-dollar conversion rate, he (Medel) is still entitled to the balance of US$ 741.98.
Computation:
P201,564.13 is equivalent to US$7,694.46,
leaving a balance of US $3,623.67
(US$11,318.13 - US$ 7,694.46);
US $3,623.67 - US$ 2,881.69 = US$741.98.
WHEREFORE, in supplement of his motion to dismiss (dated April 20, 1996), the complainant prays that the aboveentitled petition of the Asia World Recruitment Inc. be DISMISSED.
Private respondent's Motion to Dismiss and Supplemental Motion to Dismiss are akin to a partial quitclaim as to the
amounts awarded by the NLRC. Nevertheless, we are mindful of the rule that "a deed of release or quitclaim cannot
always bar an employee from demanding what is legally due him." 14 Hence, notwithstanding the substantial
satisfaction of the amounts prayed for, the basic issue in this case remains for the Court's resolution.
At the outset, except for serious lapses, we are not at liberty to overturn the findings of both the NLRC and the POEA
Administrator on the circumstances concerning the dismissal of private respondent. These are essentially factual
matters which are within the competence of the administrative agencies to determine. Their findings are accorded by
this Court respect and finality if, as in this case, they are supported by substantial evidence. 15
The records clearly show that private respondent was an employee with a fixed period of twelve (12) months. Private
respondent, therefore, was an employee hired for a fixed term whose employment was to end only at the expiration of
the period stipulated in his contract.16 Thus, this is not a simple case of illegal dismissal of an employee whose
employment is without a definite period, rather, we find that the principal cause of action in private respondent's
complaint is breach of contract of employment for a definite period. 17 As a party to this contract, he enjoys security of
tenure, for the period of time his contract is in effect. 18 Petitioner contends that private respondent was only a
probationary employee for a period of three (3) months. Even if granted, for the sake of argument, that this were true,
as a probationary employee, he is nonetheless entitled to constitutional protection of security of tenure that no worker
shall be dismissed except for cause provided by law and after due process. 19 Security of tenure is a right of
paramount value guaranteed by the Constitution and should not be denied on mere speculation. 20 Furthermore, the
right of an employer to freely select or discharge his employees is regulated by the State, considering that the
preservation of the lives of the citizens is a duty of the State, more basic than the preservation of business profit. 21
The burden is on the employer to prove that the termination was after due process, and for a valid or authorized
cause.22 For the two requisites in our jurisdiction to constitute a valid dismissal are: (a) the existence of a cause
expressly stated in Article 282 of the Labor Code; and (b) the observance of due process, including the opportunity
given the employee to be heard and defend himself. 23 As correctly found by the NLRC, there was no valid cause for
dismissal of private respondent. Thus
As in the instant case respondent claim that complainant was terminated due to incompetence. The burden of proof to
[establish] such incompetence rests on respondents. The evidence adduced by them were insufficient to prove the
alleged incompetence of complainant. Even the "termination letter" itself does not state the how and why complainant
was considered incompetent. It merely stated that the company "is not satisfied" with his performance during the

56
probationary period. Respondent even failed to attach to said letter the rating sheets of complainant for his
information as that he may present his side.24
Worse, in the petition for certiorari, petitioner invoked the provision in the employment contract which allows summary
dismissal for cases provided therein.25 Consequently, petitioner argues that written notice to the private respondent
was no longer an indispensable procedural requirement to satisfy the dictates of due process but was merely a
formality in the course of effecting severance of employment. 26 Such blatant violation of basic labor law principles
cannot be permitted by this Court. Although a contract is law between the parties, the provisions of positive law which
regulate such contracts are deemed included and shall limit and govern the relations between the parties. 27 Petitioner,
in our view, failed to rebut the following findings of the respondent NLRC
Records also show that the letter of termination dated March 1, 1989 was received by complainant on March 10, 1989
when he was terminated. He was repatriated on March 12, 1989. Taking into consideration the effectivity date of his
termination, and the span of time the letter was received and his date of repatriation, we cannot consider that such is
the notice required for a valid termination of employment. 28
Jurisprudence abounds on the twin requirements of due process, substantive and procedural, which must be
complied with, before a valid dismissal exists.29 The twin requirements of notice and hearing constitute the essential
elements of due process. Simply put, the employer shall afford the worker ample opportunity to be heard and to
defend himself with the assistance of his representative, if he so desires. As held in the case ofInternational
Pharmaceuticals, Inc. v. National Labor Relations Commission, 287 SCRA 213, 227 (1998):
The law requires that the employer must furnish the worker sought to be dismissed with two written notices before
termination of employee can be legally effected: (1) notice which apprises the employee of the particular acts or
omissions for which his dismissal is sought; and (2) the subsequent notice which informs the employee of the
employer's decision to dismiss him. (Sec. 13, BP 130; Sections 2-6, Rule XIV, Book V, Rules and Regulations
Implementing the Labor Code as amended). Failure to comply with the requirements taints the dismissal with
illegality. . . . [Citing Aurora Land Projects Corp. v. NLRC; 266 SCRA 48 (1997); Tingson, Jr. v. NLRC, 185 SCRA 498
(1990); National Service Corporation v. NLRC, 168 SCRA 122 (1988); Ruffy v. NLRC, 182 SCRA 365 (1990).]
Applying the above legal criteria, we find that private respondent herein was indeed dismissed without cause and
without due process.
Although the Labor Code is silent on the liability of an employer for damages in case the termination is declared to be
unjust, we have ruled,30 however, that the employer may be so liable if, in terminating the employment, it also
committed an antisocial and oppressive abuse of its right to investigate and dismiss its employee in violation of Article
1701 of the Civil Code.31 Further, in CLLC E.G. Gochangco Workers Union v. NLRC, 161 SCRA 655, 671 (1988), we
already stated:
As for moral damages, we hold the said respondent liable therefor under the provisions of Article 2220 of the Civil
Code providing for damages for "breaches of contract where the defendant acted fraudulently or in bad faith."
Hence, we now hold that private respondent is entitled to moral damages amounting to TWENTY-FIVE THOUSAND
PESOS (P25,000.00), considering that his dismissal was marked by precipitate dispatch and utter disregard of due
process.
One final note. The need for strict enforcement of the law as well as rules and regulations governing Filipino contract
workers cannot be over-emphasized. Many hapless citizens of this country have sought employment abroad to earn a
few dollars in order to improve their lot, and provide proper education and a decent future for their children, but have
found themselves exploited by foreign employers or recruiters who harass or abuse them. They are deprived of their
jobs without cause or at the slightest pretense. Hence, Filipino recruiting agencies must not only faithfully comply with
Government-prescribed responsibilities; they must also impose upon themselves the duty, borne out of a social
conscience, to properly help fellow citizens sent abroad to work for foreign principals. They must keep in mind that
this country is not exporting slaves but human beings, and, above all, fellow Filipinos seeking merely to improve their
lives.32
WHEREFORE, finding no grave abuse of discretion committed by public respondent NLRC, the assailed Decision
dated September 13, 1993 and Resolution dated October 29, 1993 are hereby AFFIRMED, with the MODIFICATION
that, it appearing that petitioner already partially satisfied the NLRC judgment except for a balance of US $741.98,
petitioner is hereby ordered to pay private respondent said amount or its prevailing peso equivalent at the time of
payment.33 The Court also finds it proper to award private respondent moral damages, and hereby ORDERS
petitioner to pay P25,000.00 as moral damages. Costs against petitioner.
SO ORDERED.

57
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153674

December 20, 2006

AVON COSMETICS, INCORPORATED and JOSE MARIE FRANCO, petitioners,

vs.
LETICIA H. LUNA, respondent.

DECISION

CHICO-NAZARIO, J.:
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, seeking to reverse and set aside
the Decision1 dated 20 May 2002 of the Court of Appeals in CA-G.R. CV No. 52550, which affirmed in totothe
Decision2 dated 26 January 1996 of the Regional Trial Court (RTC) of Makati City, Branch 138, in Civil Case No. 882595, in favor of herein respondent Leticia H. Luna (Luna), rendered by the Honorable Ed Vicente S. Albano,
designated as the "assisting judge" pursuant to Supreme Court Administrative Order No. 70-94, dated 16 June 1994.
The Facts
The facts of the case are not in dispute. As culled from the records, they are as follows:
The present petition stemmed from a complaint 3 dated 1 December 1988, filed by herein respondent Luna
alleging, inter alia that she began working for Beautifont, Inc. in 1972, first as a franchise dealer and then a year later,
as a Supervisor.
Sometime in 1978, Avon Cosmetics, Inc. (Avon), herein petitioner, acquired and took over the management and
operations of Beautifont, Inc. Nonetheless, respondent Luna continued working for said successor company.
Aside from her work as a supervisor, respondent Luna also acted as a make-up artist of petitioner Avons Theatrical
Promotions Group, for which she received a per diem for each theatrical performance.
On 5 November 1985, petitioner Avon and respondent Luna entered into an agreement, entitled Supervisors
Agreement, whereby said parties contracted in the manner quoted below:
The Company agrees:
xxxx
1) To allow the Supervisor to purchase at wholesale the products of the Company.
xxxx
The Supervisor agrees:
1) To purchase products from the Company exclusively for resale and to be responsible for obtaining all permits and
licenses required to sell the products on retail.
xxxx
The Company and the Supervisor mutually agree:
xxxx

58
2) That this agreement in no way makes the Supervisor an employee or agent of the Company, therefore, the
Supervisor has no authority to bind the Company in any contracts with other parties.
3) That the Supervisor is an independent retailer/dealer insofar as the Company is concerned, and shall have the sole
discretion to determine where and how products purchased from the Company will be sold. However, the Supervisor
shall not sell such products to stores, supermarkets or to any entity or person who sells things at a fixed place of
business.
4) That this agreement supersedes any agreement/s between the Company and the Supervisor.
5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the
Company.
6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other.
x x x x.4
By virtue of the execution of the aforequoted Supervisors Agreement, respondent Luna became part of the
independent sales force of petitioner Avon.
Sometime in the latter part of 1988, respondent Luna was invited by a former Avon employee who was then currently
a Sales Manager of Sandr Philippines, Inc., a domestic corporation engaged in direct selling of vitamins and other
food supplements, to sell said products. Respondent Luna apparently accepted the invitation as she then became a
Group Franchise Director of Sandr Philippines, Inc. concurrently with being a Group Supervisor of petitioner Avon.
As Group Franchise Director, respondent Luna began selling and/or promoting Sandr products to other Avon
employees and friends. On 23 September 1988, she requested a law firm to render a legal opinion as to the legal
consequence of the Supervisors Agreement she executed with petitioner Avon. In response to her query, a lawyer of
the firm opined that the Supervisors Agreement was "contrary to law and public policy."
Wanting to share the legal opinion she obtained from her legal counsel, respondent Luna wrote a letter to her
colleagues and attached mimeographed copies of the opinion and then circulated them. The full text of her letter
reads:
We all love our work as independent dealers and we all love to continue in this livelihood. Because my livelihood is
important to me, I have asked the legal opinion of a leading Makati law office regarding my status as an independent
dealer, I am sharing this opinion with you.
I have asked their advice on three specific things:
1) May the company legally change the conditions of the existing "Supervisors Agreement" without the Supervisors
consent? If I should refuse to sign the new Agreement, may the company terminate my dealership?
On the first issue, my lawyers said that the company cannot change the existing "Agreement" without my consent,
and that it would be illegal if the company will compel me to sign the new agreement.
2) Is Section 5 of the "Supervisors Agreement" which says that a dealer may only sell products sold by the company,
legal?
My lawyers said that Section 5 of the Supervisors Agreement is NOT valid because it is contrary to public policy,
being an unreasonable restraint of trade.
3) Is Section 6 of the "Supervisors Agreement" which authorizes the company to terminate the contract at any time,
with or without cause, legal?
My lawyer said Section 6 is NOT valid because it is contrary to law and public policy. The company cannot terminate
the "Supervisors Agreement" without a valid cause.
Therefore, I can conclude that I dont violate Section 5 if I sell any product which is not in direct competition with the
companys products, and there is no valid reason for the company to terminate my dealership contract if I sell a noncompetitive product.
Dear co-supervisor[s], let us all support the reasonable and legal policies of the company. However, we must all be
conscious of our legal rights and be ready to protect ourselves if they are trampled upon.

59
I hope we will all stay together selling Avon products for a long time and at the same time increase our earning
opportunity by engaging in other businesses without being afraid to do so.
In a letter5 dated 11 October 1988, petitioner Avon, through its President and General Manager, Jose Mari Franco,
notified respondent Luna of the termination or cancellation of her Supervisors Agreement with petitioner Avon. Said
letter reads in part:
In September, (sic) 1988, you brought to our attention that you signed up as Group Franchise Director of another
company, Sandr Philippines, Inc. (SPI).
Not only that. You have also sold and promoted products of SPI (please refer for example to SPI Invoice No. 1695
dated Sept. 30, 1988). Worse, you promoted/sold SPI products even to several employees of our company including
Mary Arlene Nolasco, Regina Porter, Emelisa Aguilar, Hermie Esteller and Emma Ticsay.
To compound your violation of the above-quoted provision, you have written letters to other members of the Avon
salesforce inducing them to violate their own contracts with our company. x x x.
For violating paragraph 5 x x x, the Company, pursuant to paragraph 6 of the same Agreement, is terminating and
canceling its Supervisors Agreement with you effective upon your receipt of this notice. We regret having to do this,
but your repeated disregard of the Agreement, despite warnings, leaves (sic) the Company no other choice.
xxxx
Aggrieved, respondent Luna filed a complaint for damages before the RTC of Makati City, Branch 138. The complaint
was docketed as Civil Case No. 88-2595.
On 26 January 1996, after trial on the merits, the RTC rendered judgment in favor of respondent Luna stating that:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered in favor of the plaintiff, and against
defendant, Avon, ordering the latter:
1) to pay moral damages to the plaintiff in the amount of P100,000.00 with interest from the date of this judgment up
to the time of complete payment;
2) to pay attorneys fees in the amount of P20,000.00;
3) to pay the costs.6
On 8 February 1996, petitioner Avon filed a Notice of Appeal dated the same day. In an Order 7 dated 15 February
1996, the RTC gave due course to the appeal and directed its Branch Clerk of Court to transmit the entire records of
the case to the Court of Appeals, which docketed the appeal as CA G.R. CV No. 52550.
On 20 May 2002, the Court of Appeals promulgated the assailed Decision, the dispositive part of which states thus:
WHEREFORE, the foregoing premises considered, the decision appealed from is hereby AFFIRMED in toto.8
The Issues
In predictable displeasure with the conclusions reached by the appellate court, petitioner Avon now implores this
Court to review, via a petition for review on certiorari under Rule 45 of the Revised Rules of Court, the formers
decision and to resolve the following assigned errors: 9
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN DECLARING THAT THE SUPERVISORS
AGREEMENT EXECUTED BETWEEN AVON AND RESPONDENT LUNA AS NULL AND VOID FOR BEING
AGAINST PUBLIC POLICY;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN HOLDING THAT AVON HAD NO RIGHT TO
TERMINATE OR CANCEL THE SUPERVIOSRS AGREEMENT;
III.

60
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN UPHOLDING THE AWARD OF MORAL DAMAGES
AND ATTORNEYS FEES IN FAVOR OF RESPONDENT LUNA; and
IV.
THE COURT OF APPEALS COMMITTED SERIOUS ERROR IN NOT AWARDING ATTORNEYS FEES AND
LITIGATION EXPENSES IN FAVOR OF PETITIONER.
The Courts Ruling
A priori, respondent Luna objects to the presentation, and eventual resolution, of the issues raised herein as they
allegedly involve questions of facts.
To be sure, questions of law are those that involve doubts or controversies on what the law is on certain state of facts;
and questions of fact, on the other hand, are those in which there is doubt or difference as to the truth or falsehood of
the alleged facts. One test, it has been held, is whether the appellate court can determine the issue raised without
reviewing or evaluating the evidence, in which case it is a question of law, otherwise it will be a question of fact. 10
In the present case, the threshold issues are a) whether or not paragraph 5 of the Supervisors Agreement is void for
being violative of law and public policy; and b) whether or not paragraph 6 of the Supervisors Agreement which
authorizes petitioner Avon to terminate or cancel the agreement at will is void for being contrary to law and public
policy. Certainly, it is quite obvious that the foregoing issues are questions of law.
In affirming the decision of the RTC declaring the subject contract null and void for being against public policy, the
Court of Appeals ruled that the exclusivity clause, which states that:
The Company and the Supervisor mutually agree:
xxxx
5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the
Company. [Emphasis supplied.]
should be interpreted to apply solely to those products directly in competition with those of petitioner Avons, i.e.,
cosmetics and/or beauty supplies and lingerie products. Its declaration is anchored on the fact that Avon products, at
that time, were not in any way similar to the products sold by Sandr Philippines, Inc. At that time, the latter was
merely selling vitamin products. Put simply, the products of the two companies do not compete with each other. The
appellate court ratiocinated that:
x x x If the agreement were interpreted otherwise, so as to include products that do not directly compete with the
products of defendant-appellant Avon, such would result in absurdity. x x x [A]greements which prohibit a person from
engaging in any enterprise whether similar or not to the enterprise of the employer constitute an unreasonable
restraint of trade, thus, it is void as against public policy.11
Petitioner Avon disputes the abovestated conclusion reached by the Court of Appeals. It argues that the latter went
beyond the literal and obvious intent of the parties to the subject contract when it interpreted the abovequoted clause
to apply only to those products that do not compete with that of petitioner Avons; and that the words "only and
exclusively" need no other interpretation other than the literal meaning that "THE SUPERVISORS CANNOT SELL
THE PRODUCTS OF OTHER COMPANIES WHETHER OR NOT THEY ARE COMPETING PRODUCTS." 12
Moreover, petitioner Avon reasons that:
The exclusivity clause was directed against the supervisors selling other products utilizing their training and
experience, and capitalizing on Avons existing network for the promotion and sale of the said products. The
exclusivity clause was meant to protect Avon from other companies, whether competitors or not, who would exploit
the sales and promotions network already established by Avon at great expense and effort.
xxxx
Obviously, Sandre Phils., Inc. did not have the (sic) its own trained personnel and network to sell and promote its
products. It was precisely why Sandre simply invited, and then and there hired Luna and other Avon supervisors and
dealers to sell and promote its products. They had the training and experience, they also had a ready market for the
other products the customers to whom they had been selling the Avon products. It was easy to entice the
supervisors to sign up. The supervisors could continue to sell Avon products, and at the same time earn additional
income by selling other products.

61
This is most unfair to Avon. The other companies cannot ride on and exploit the training and experience of the Avon
sales force to sell and promote their own products. [Emphasis supplied.]
On the other hand, in her Memorandum, respondent Luna counters that "there is no allegation nor any finding by the
trial court or the Court of Appeals of an existing nationwide sales and promotions network established by Avon or
Avons existing sales promotions network or Avons tried and tested sales and promotions network nor the alleged
damage caused to such system caused by other companies." Further, well worth noting is the opinion of respondent
Lunas counsel which started the set off the series of events which culminated to the termination or cancellation of the
Supervisors Agreement. In response to the query-letter 13 of respondent Luna, the latters legal counsel opined that,
as allegedly held in the case of Ferrazzini v. Gsell,14 paragraph 5 of the subject Supervisors Agreement "not only
prohibits the supervisor from selling products which compete with the companys product but restricts likewise the
supervisor from engaging in any industry which involves sales in general." 15 Said counsel thereafter concluded that
the subject provision in the Supervisors Agreement constitutes an unreasonable restraint of trade and, therefore, void
for being contrary to public policy.
At the crux of the first issue is the validity of paragraph 5 of the Supervisors Agreement, viz:
The Company and the Supervisor mutually agree:
xxxx
5) That the Supervisor shall sell or offer to sell, display or promote only and exclusively products sold by the
Company. [Emphasis supplied.]
In business parlance, this is commonly termed as the "exclusivity clause." This is defined as agreements which
prohibit the obligor from engaging in "business" in competition with the obligee.
This exclusivity clause is more often the subject of critical scrutiny when it is perceived to collide with the
Constitutional proscription against "reasonable restraint of trade or occupation." The pertinent provision of the
Constitution is quoted hereunder. Section 19 of Article XII of the 1987 Constitution on the National Economy and
Patrimony states that:
SEC. 19. The State shall regulate or prohibit monopolies when the public interest so requires. No combinations in
restraint of trade or unfair competition shall be allowed.
First off, restraint of trade or occupation embraces acts, contracts, agreements or combinations which restrict
competition or obstruct due course of trade.16
Now to the basics. From the wordings of the Constitution, truly then, what is brought about to lay the test on whether
a given agreement constitutes an unlawful machination or combination in restraint of trade is whether under the
particular circumstances of the case and the nature of the particular contract involved, such contract is, or is not,
against public interest.17
Thus, restrictions upon trade may be upheld when not contrary to public welfare and not greater than is necessary to
afford a fair and reasonable protection to the party in whose favor it is imposed. 18 Even contracts which prohibit an
employee from engaging in business in competition with the employer are not necessarily void for being in restraint of
trade.
In sum, contracts requiring exclusivity are not per se void. Each contract must be viewed vis--vis all the
circumstances surrounding such agreement in deciding whether a restrictive practice should be prohibited as
imposing an unreasonable restraint on competition.
The question that now crops up is this, when is a restraint in trade unreasonable? Authorities are one in declaring that
a restraint in trade is unreasonable when it is contrary to public policy or public welfare. As far back as 1916, in the
case of Ferrazzini v. Gsell,19 this Court has had the occasion to declare that:
There is no difference in principle between the public policy (orden pblico) in the in the two jurisdictions (United
States and the Philippine Islands) as determined by the Constitution, laws, and judicial decisions.
In the United States it is well settled that contracts in undue or unreasonable restraint of trade are unenforcible
because they are repugnant to the established public policy in that country. Such contracts are illegal in the sense
that the law will not enforce them. The Supreme Court in the United States, in Oregon Steam Navigation Co. vs.
Winsor )20 Will., 64), quoted with approval in Gibbs v. Consolidated gas Co. of Baltimore (130 U.S., 396), said:
Cases must be judged according to their circumstances, and can only be rightly judged when reason and grounds of
the rule are carefully considered. There are two principle grounds on which the doctrine is founded that a contract in

62
restraint of trade is void as against public policy. One is, the injury to the public by being deprived of the restricted
partys industry; and the other is, the injury to the party himself by being precluded from pursuing his occupation, and
thus being prevented from supporting himself and his family.
And what is public policy? In the words of the eminent Spanish jurist, Don Jose Maria Manresa, in his commentaries
of the Codigo Civil, public policy (orden pblico):
Represents in the law of persons the public, social and legal interest, that which is permanent and essential of the
institutions, that which, even if favoring an individual in whom the right lies, cannot be left to his own will. It is an idea
which, in cases of the waiver of any right, is manifested with clearness and force. 20
As applied to agreements, Quintus Mucius Scaevola, another distinguished civilist gives the term "public policy" a
more defined meaning:
Agreements in violation of orden pblico must be considered as those which conflict with law, whether properly,
strictly and wholly a public law (derecho) or whether a law of the person, but law which in certain respects affects the
interest of society. 21
Plainly put, public policy is that principle of the law which holds that no subject or citizen can lawfully do that which
has a tendency to be injurious to the public or against the public good. 22 As applied to contracts, in the absence of
express legislation or constitutional prohibition, a court, in order to declare a contract void as against public policy,
must find that the contract as to the consideration or thing to be done, has a tendency to injure the public, is against
the public good, or contravenes some established interests of society, or is inconsistent with sound policy and good
morals, or tends clearly to undermine the security of individual rights, whether of personal liability or of private
property.23
From another perspective, the main objection to exclusive dealing is its tendency to foreclose existing competitors or
new entrants from competition in the covered portion of the relevant market during the term of the agreement. 24Only
those arrangements whose probable effect is to foreclose competition in a substantial share of the line of commerce
affected can be considered as void for being against public policy. The foreclosure effect, if any, depends on the
market share involved. The relevant market for this purpose includes the full range of selling opportunities reasonably
open to rivals, namely, all the product and geographic sales they may readily compete for, using easily convertible
plants and marketing organizations.25
Applying the preceding principles to the case at bar, there is nothing invalid or contrary to public policy either in the
objectives sought to be attained by paragraph 5, i.e., the exclusivity clause, in prohibiting respondent Luna, and all
other Avon supervisors, from selling products other than those manufactured by petitioner Avon. We quote with
approval the determination of the U.S. Supreme Court in the case of Board of Trade of Chicago v. U.S.26 that "the
question to be determined is whether the restraint imposed is such as merely regulates and perhaps thereby
promotes competition, or whether it is such as may suppress or even destroy competition."
Such prohibition is neither directed to eliminate the competition like Sandr Phils., Inc. nor foreclose new entrants to
the market. In its Memorandum, it admits that the reason for such exclusion is to safeguard the network that it has
cultivated through the years. Admittedly, both companies employ the direct selling method in order to peddle their
products. By direct selling, petitioner Avon and Sandre, the manufacturer, forego the use of a middleman in selling
their products, thus, controlling the price by which they are to be sold. The limitation does not affect the public at all. It
is only a means by which petitioner Avon is able to protect its investment.
It was not by chance that Sandr Philippines, Inc. made respondent Luna one of its Group Franchise Directors. It
doesnt take a genius to realize that by making her an important part of its distribution arm, Sandr Philippines, Inc., a
newly formed direct-selling business, would be saving time, effort and money as it will no longer have to recruit, train
and motivate supervisors and dealers. Respondent Luna, who learned the tricks of the trade from petitioner Avon, will
do it for them. This is tantamount to unjust enrichment. Worse, the goodwill established by petitioner Avon among its
loyal customers will be taken advantaged of by Sandre Philippines, Inc. It is not so hard to imagine the scenario
wherein the sale of Sandr products by Avon dealers will engender a belief in the minds of loyal Avon customers that
the product that they are buying had been manufactured by Avon. In other words, they will be misled into thinking that
the Sandr products are in fact Avon products. From the foregoing, it cannot be said that the purpose of the
subject exclusivity clause is to foreclose the competition, that is, the entrance of Sandr products in to the market.
Therefore, it cannot be considered void for being against public policy. How can the protection of ones property be
violative of public policy? Sandr Philippines, Inc. is still very much free to distribute its products in the market but it
must do so at its own expense. The exclusivity clause does not in any way limit its selling opportunities, just the
undue use of the resources of petitioner Avon.
It has been argued that the Supervisors Agreement is in the nature of a contract of adhesion; but just because it is
does not necessarily mean that it is void. A contract of adhesion is so-called because its terms are prepared by only
one party while the other party merely affixes his signature signifying his adhesion thereto. 27 Such contract is just as
binding as ordinary contracts. "It is true that we have, on occasion, struck down such contracts as void when the

63
weaker party is imposed upon in dealing with the dominant bargaining party and is reduced to the alternative of taking
it or leaving it, completely deprived of the opportunity to bargain on equal footing. Nevertheless, contracts of adhesion
are not invalid per se and they are not entirely prohibited. The one who adheres to the contract is in reality free to
reject it entirely, if he adheres, he gives his consent." 28 In the case at bar, there was no indication that respondent
Luna was forced to sign the subject agreement. Being of age, financially stable and with vast business experience,
she is presumed to have acted with due care and to have signed the assailed contract with full knowledge of its
import. Under the premises, it would be difficult to assume that she was morally abused. She was free to reject the
agreement if she wanted to.
Accordingly, a contract duly executed is the law between the parties, and they are obliged to comply fully and not
selectively with its terms. A contract of adhesion is no exception. 29
The foregoing premises noted, the Court of Appeals, therefore, committed reversible error in interpreting the
subject exclusivity clause to apply merely to those products in direct competition to those manufactured and sold by
petitioner Avon. When the terms of the agreement are clear and explicit, that they do not justify an attempt to read into
any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the
contract.30 Thus, in order to judge the intention of the contracting parties, "the circumstances under which it was
made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be
placed in the position of those whose language he is to interpret." 31 It has been held that once this intention of the
parties has been ascertained, it becomes an integral part of the contract as though it has been originally expressed
therein in unequivocal terms.32
Having held that the "exclusivity clause" as embodied in paragraph 5 of the Supervisors Agreement is valid and not
against public policy, we now pass to a consideration of respondent Lunas objections to the validity of her termination
as provided for under paragraph 6 of the Supervisors Agreement giving petitioner Avon the right to terminate or
cancel such contract. The paragraph 6 or the "termination clause" therein expressly provides that:
The Company and the Supervisor mutually agree:
xxxx
6) Either party may terminate this agreement at will, with or without cause, at any time upon notice to the other.
[Emphasis supplied.]
In the case of Petrophil Corporation v. Court of Appeals,33 this Court already had the opportunity to opine that
termination or cancellation clauses such as that subject of the case at bar are legitimate if exercised in good faith. The
facts of said case likewise involved a termination or cancellation clause that clearly provided for two ways of
terminating the contract, i.e., with or without cause. The utilization of one mode will not preclude the use of the other.
Therein, we stated that the finding that the termination of the contract was "for cause," is immaterial. When petitioner
terminated the contract "without cause," it was required only to give x x x a 30-day prior written notice, which it did.
In the case at bar, the termination clause of the Supervisors Agreement clearly provides for two ways of terminating
and/or canceling the contract. One mode does not exclude the other. The contract provided that it can be terminated
or cancelled for cause, it also stated that it can be terminated without cause, both at any time and after written notice.
Thus, whether or not the termination or cancellation of the Supervisors Agreement was "for cause," is immaterial. The
only requirement is that of notice to the other party. When petitioner Avon chose to terminate the contract, for cause,
respondent Luna was duly notified thereof.
Worth stressing is that the right to unilaterally terminate or cancel the Supervisors Agreement with or without cause is
equally available to respondent Luna, subject to the same notice requirement. Obviously, no advantage is taken
against each other by the contracting parties.
WHEREFORE, in view of the foregoing, the instant petition is GRANTED. The Decision dated 20 May 2002 rendered
by the Court of Appeals in CA-G.R. CV No. 52550, affirming the judgment of the RTC of Makati City, Branch 138, in
Civil Case No. 88-2595, are hereby REVERSED and SET ASIDE. Accordingly, let a new one be entered dismissing
the complaint for damages. Costs against respondent Leticia Luna.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

64
G.R. No. 164549

September 18, 2009

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
SPOUSES AGUSTIN and PILAR ROCAMORA, Respondents.
DECISION
BRION, J.:
We resolve in this petition for review on certiorari1 the legal propriety of the deficiency judgment that the petitioner
Philippine National Bank (PNB) seeks against the respondents the spouses Agustin and Pilar Rocamora (spouses
Rocamora).
THE FACTUAL ANTECEDENTS
On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the aggregate amount
ofP100,000.00 under the Cottage Industry Guarantee and Loan Fund (CIGLF). The loan was payable in five years,
under the following terms: P35,000 payable semi-annually and P65,000 payable annually. In addition to the principal
amount, the spouses Rocamora agreed to pay interest at the rate of 12% per annum, plus a penalty fee of 5% per
annum in case of delayed payments. The spouses Rocamora signed two promissory notes 2 evidencing the loan.
To secure their loan obligations, the spouses Rocamora executed two mortgages: a real estate mortgage 3 over a
property covered by Transfer Certificate of Title No. 7160 in the amount of P10,000, and a chattel mortgage4 over
various machineries in the amount of P25,000. Payment of the remaining P65,000 was under the CIGLF guarantee,
with the spouses Rocamora paying the required guarantee fee.
Both the promissory note and the real estate mortgage deed contained an escalation clause that allowed PNB to
increase the 12% interest rate at anytime without notice, within the limits allowed by law. The pertinent portion of the
promissory note stated:
For value received, we, jointly and severally, promise to pay to the ORDER of the PHILIPPINE NATIONAL BANK, at
its office in Pto. Princesa City, Philippines, the sum of xxx together with interest thereon at the rate of 12% per annum
until paid, which interest rate the Bank may at any time, without notice, raise within the limits allowed by
law, and I/we also agree to pay jointly and severally, 5% per annum penalty charge, by way of liquidated damages,
should this note be unpaid or is not renewed on due date. [Emphasis supplied.]
While paragraph (k) of the real estate mortgage deed provided:
(k) INCREASE OF INTEREST RATE
The MORTGAGEE reserves the right to increase the interest rate charged on the obligation secured by this
mortgage including any amount which it may have advanced within the limits allowed by law at any time
depending on whatever policy it may adopt in the future; Provided, that the interest rate on the accommodation/s
secured by the mortgage shall be correspondingly decreased in the event that the applicable maximum interest rate is
reduced by law or by the Monetary Board. In either case, the adjustment in the interest rate agreed upon shall take
effect on the effectivity date of the increase or decrease in that maximum interest rate. [Emphasis supplied.]
The spouses Rocamora only paid a total of P32,383.655 on the loan. Hence, the PNB commenced foreclosure
proceedings in August and October 1990. The foreclosure of the mortgaged properties yielded P75,500.00 as total
proceeds.
After the foreclosure, PNB found that the recovered proceeds and the amounts the spouses Rocamora previously
paid were not sufficient to satisfy the loan obligations. PNB thus filed, on January 18, 1994, a complaint for
deficiency judgment6 before the Regional Trial Court (RTC) of Puerto Princesa City, Branch 48. The PNB alleged
that as of January 7, 1994, the outstanding balance of the spouses Rocamoras loan (including interests and
penalties) was P206,297.47, broken down as follows:
Principal.............
Total interest due up to 01-07-94..
Total penalty due up to 01-07-94..
TOTAL AMOUNT DUE AND PAYABLE

P 79,484.65
51,229.35
75,583.47
P 206,297.477

65
The PNB claimed that the outstanding principal balance as of foreclosure date (September 19, 1990) wasP79,484.65,
plus interest and penalties, for a total due and demandable obligation of P250,812.10. Allegedly, after deducting
the P75,500 proceeds of the foreclosure sale, the spouses Rocamora still owed the bankP206,297.47.
The spouses Rocamora refused to pay the amount claimed as deficiency. They alleged that the PNB "practically
created" the deficiency by (a) increasing the interest rates from 12% to 42% per annum, and (b) failing to immediately
foreclose the mortgage pursuant to Presidential Decree No. 385 (PD 385 or the Mandatory Foreclosure Law) to
prevent the interest and penalty charges from accruing.
The RTC dismissed PNBs complaint in its decision dated November 10, 1999. 8 The trial court invalidated the
escalation clause in the promissory note and the resulting increased interest rates. The court also rejected PNBs
reason for the delay in commencing foreclosure proceedings, ruling that the delay was contrary to the immediate and
mandatory foreclosure that PD 385 required. The finding that the banks actions were contrary to law, justice, and
morals justified the award of actual, moral, and exemplary damages to the spouses Rocamora. Attorneys fees and
costs of suit were also ordered paid. 9
Except for modifications in the awarded damages, the Court of Appeals (CA) decision of March 23, 2004 affirmed the
RTC ruling.10 The CA held that the PNB effectively negated the principle of mutuality of contracts when it increased
the interest rates without the spouses Rocamoras conformity. The CA also found the long delay in the foreclosure of
the mortgage, apparently a management lapse, prejudicial to the spouses Rocamoras interests and contrary as well
to law and justice. More importantly, the CA found insufficient evidence to support theP206,297.47 deficiency claim;
the banks testimonial and documentary evidence did not support the deficiency claim that, moreover, was computed
based on bloated interest rates. The CA maintained these rulings despite the motion for reconsideration PNB
filed;11 hence, PNBs present recourse to this Court.
THE PETITION
In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that the RTC and the CA erred in
invalidating the escalation clause in the parties agreement because it fully complied with the requirements for a valid
escalation clause under this Courts following pronouncement in Banco Filipino Savings and Mortgage Bank v.
Navarro:12]
It is now clear that from March 17, 1980 [the effectivity date of Presidential Decree No. 1684 allowing the increase in
the stipulated rate of interest], escalation clauses, to be valid, should specifically provide: (1) that there can be
an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to
be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable
maximum rate of interest is reduced by law or by the Monetary Board." [Emphasis supplied.]
The PNB posits that the presence of a "de-escalation clause" (referring to the second of the above requirements,
which was designed to prevent a resulting one-sided situation on the part of the lender-bank) in the real estate
mortgage deed rules out any violation of the principle of mutuality of contracts.
The PNB also contends that it did not unreasonably delay the institution of foreclosure proceedings by acting three
years after the spouses Rocamora defaulted on their obligation. Under Article 1142 of the Civil Code, a mortgage
action prescribes in 10 years; the same 10-year period is provided in Article 1144 (1) for actions based on written
contracts. Thus, the PNB alleges that it had 10 years from 1987 (the time when the spouses Rocamora allegedly
defaulted from paying their loan obligation) to institute the foreclosure proceedings. Its decision to foreclose in 1990
three years after the default should not be taken against it, especially since the delay was prompted by the banks
sincere desire to assist the spouses Rocamora.
Additionally, the PNB claims that the decision to foreclose is entirely the banks prerogative. The provisions of PD 385
should not be read as a limitation affecting the right of banks to foreclose within the 10-year period granted under the
Civil Code. While PD 385 requires government banks to immediately foreclose mortgages under specified conditions,
the provision does not limit the period within which the bank can foreclose; to hold otherwise would be contrary to the
stated objectives of PD 385 to enhance the resources of government financial institutions and to facilitate the
financing of essential development programs and projects.
On the basis of these arguments, the PNB contests the damages awarded to the spouses Rocamora, as the PNB
had no malice, nor any furtive design: when it increased the interest rates pursuant to the escalation clause; when it
decided to foreclose the mortgages only in 1990; and when it sought to claim the deficiency. PNB claimed all these to
be proper acts made in the exercise of its rights.
Opposing the PNBs arguments, the spouses Rocamora allege the following:
a. The PNB failed to sufficiently and satisfactorily prove the amount of P250,812.10, claimed to be the total
obligation due at the time of foreclosure, against which the proceeds of the foreclosure sale (P75,500.00)
were deducted and which became the basis of the banks deficiency claim (P206,297.47);

66
b. The "ballooning" of the spouses Rocamoras loan obligation was the PNBs own doing when it increased
the interest rates and failed to immediately foreclose the mortgages;
c. The PNBs unilateral increase of interest rates violated the principle of mutuality of contracts;
d. The PNB failed to comply with the immediate and mandatory foreclosure required under PD 385; and
e. The PNB failed to call on the CIGLF which secured the payment of P65,000.00 of the loan.
THE COURTS RULING
We find no basis to reverse the CAs decision and, consequently, deny the petition.
Proof of Deficiency Claim Necessary
The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508 and 3135, respectively. Although
both laws do not contain a provision expressly or impliedly authorizing the mortgagee to recover the deficiency
resulting after the foreclosure proceeds are deducted from the principal obligation, the Court has construed the laws
silence as a grant to the mortgagee of the right to maintain an action for the deficiency; the mortgages are given
merely as security, not as settlement or satisfaction of the indebtedness.13
As in any claim for payment of money, a mortgagee must be able to prove the basis for the deficiency judgment it
seeks. The right of the mortgagee to pursue the debtor arises only when the proceeds of the foreclosure sale are
ascertained to be insufficient to cover the obligation and the other costs at the time of the sale. 14 Thus, the amount of
the obligation prior to foreclosure and the proceeds of the foreclosure are material in a claim for deficiency.
In this case, both the RTC and the CA found that PNB failed to prove the claimed deficiency; its own testimonial and
documentary evidence in fact contradicted one another. The PNB alleged that the spouses Rocamoras obligation at
the time of foreclosure (September 19, 1990) amounted to P250,812.10, yet its own documentary evidence15 showed
that, as of that date, the total obligation was only P206,664.34; the PNBs own witness, Mr. Reynaldo Caso, testified
that the amount due from the spouses Rocamora was only P206,664.34.
At any rate, whether the total obligation due at the time of foreclosure was P250,812.10 as PNB insisted
orP206,664.34 as its own record disclosed, our own computation of the amounts involved does not add up to
theP206,297.47 PNB claimed as deficiency.16 We find it significant that PNB has been consistently unable to provide
a detailed and credible accounting of the claimed deficiency. What appears clear is that after adding up the spouses
Rocamoras partial payments and the proceeds of the foreclosure, the PNB has already received a total
of P107,883.68 as payment for the spouses Rocamoras P100,000.00 loan; the claimed P206,297.47 deficiency
consisted mainly of interests and penalty charges (or about 61.5% of the amount claimed). The spouses Rocamora
posit that their loan would not have bloated to more than double the original amount if PNB had not increased the
interest rates and had it immediately foreclosed the mortgages.
Escalation clauses do not authorize the unilateral increase of interest rates
Escalation clauses are valid and do not contravene public policy.17 These clauses are common in credit agreements
as means of maintaining fiscal stability and retaining the value of money on long-term contracts. To avoid any
resulting one-sided situation that escalation clauses may bring, we required in Banco Filipino18] the inclusion in the
parties agreement of a de-escalation clause that would authorize a reduction in the interest rates corresponding to
downward changes made by law or by the Monetary Board.
The validity of escalation clauses notwithstanding, we cautioned that these clauses do not give creditors the unbridled
right to adjust interest rates unilaterally.19 As we said in the same Banco Filipino case, any increase in the rate of
interest made pursuant to an escalation clause must be the result of an agreement between the parties. 20 The
minds of all the parties must meet on the proposed modification as this modification affects an important aspect of the
agreement. There can be no contract in the true sense in the absence of the element of an agreement, i.e., the
parties mutual consent. Thus, any change must be mutually agreed upon, otherwise, the change carries no
binding effect.21 A stipulation on the validity or compliance with the contract that is left solely to the will of one of the
parties is void; the stipulation goes against the principle of mutuality of contract under Article 1308 of the Civil
Code.22 As correctly found by the appellate court, even with a de-escalation clause, no matter how elaborately
worded, an unconsented increase in interest rates is ineffective if it transgresses the principle of mutuality of
contracts.
Precisely for this reason, we struck down in several cases many of them involving PNB the increase of interest
rates unilaterally imposed by creditors. In the 1991 case of PNB v. CA and Ambrosio Padilla, 23 we declared:

67
In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality
between the parties based on their essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties, is void. Hence, even assuming
that the P1.8 million loan agreement between the PNB and private respondent gave the PNB a license
(although in fact there was none) to increase the interest rate at will during the term of the loan, that license
would have been null and void for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on
equal footing, the weaker partys (the debtor) participation being reduced to the alternative "to take it or leave it." Such
a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and
imposition.
We repeated this rule in the 1994 case of PNB v. CA and Jayme-Fernandez24 and the 1996 case of PNB v. CA and
Spouses Basco. 25 Taking no heed of these rulings, the escalation clause PNB used in the present case to justify the
increased interest rates is no different from the escalation clause assailed in the 1996 PNB case;26 in both, the
interest rates were increased from the agreed 12% per annum rate to 42%. We held:
PNB successively increased the stipulated interest so that what was originally 12% per annum became, after only two
years, 42%. In declaring the increases invalid, we held:
We cannot countenance petitioner bank's posturing that the escalation clause at bench gives it unbridled
right to unilaterally upwardly adjust the interest on private respondents' loan. That wouldcompletely take
away from private respondents the right to assent to an important modification in their agreement, and would
negate the element of mutuality in contracts.
xxxx
In this case no attempt was made by PNB to secure the conformity of private respondents to the successive
increases in the interest rate. Private respondents' assent to the increases cannot be implied from their lack
of response to the letters sent by PNB, informing them of the increases. For as stated in one case, no one
receiving a proposal to change a contract is obliged to answer the proposal. 27 [Emphasis supplied.]
On the strength of this ruling, PNBs argument that the spouses Rocamoras failure to contest the increased interest
rates that were purportedly reflected in the statements of account and the demand letters sent by the bank amounted
to their implied acceptance of the increase should likewise fail.
Evidently, PNBs failure to secure the spouses Rocamoras consent to the increased interest rates prompted the lower
courts to declare excessive and illegal the interest rates imposed. To go around this lower court finding, PNB alleges
that the P206,297.47 deficiency claim was computed using only the original 12% per annum interest rate. We find this
unlikely. Our examination of PNBs own ledgers, included in the records of the case, clearly indicates that PNB
imposed interest rates higher than the agreed 12% per annum rate. 28 This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the rule that findings of the RTC, when affirmed
by the CA, are binding upon this Court.1avvphi1
PD 385 mandates immediate foreclosure of collaterals and securities when the arrearages amount to at least
20% of the total outstanding obligation
Another reason that militates against the deficiency claim is PNBs own admitted delay in instituting the foreclosure
proceedings.29
Section 1 of PD 385 states:
Section 1. It shall be mandatory for government financial institutions, after the lapse of sixty (60) days from the
issuance of this Decree, to foreclose the collaterals and/or securities for any loan, credit, accommodation,
and/or guarantees granted by them whenever the arrearages on such account, including accrued interest and
other charges, amount to at least twenty percent (20%) of the total outstanding obligations, including interest
and other charges, as appearing in the books of account and/or related records of the financial institution concerned.
This shall be without prejudice to the exercise by the government financial institutions of such rights and/or remedies
available to them under their respective contracts with their debtors, including the right to foreclose on loans, credits,
accommodations and/or guarantees on which the arrearages are less than twenty percent (20%). [Emphasis
supplied.]
Under PD 385, government financial institutions which was PNBs status prior to its full privatization in 1996
aremandated to immediately foreclose the securities given for any loan when the arrearages amount to at least
20% of the total outstanding obligation.30

68
As stated in the narrated facts, PNB commenced foreclosure proceedings in 1990 or three years after the spouses
defaulted on their obligation in 1987. On this factual premise, the PNB now insists as a legal argument that its right to
foreclose should not be affected by the mandatory tenor of PD 385, since it exercised its right still within the 10-year
prescription period allowed under Articles 1142 and 1144 (1) of the Civil Code.
PNBs argument completely misses the point. The issue before us is the effect of the delay in commencing
foreclosure proceedings on PNBs right to recover the deficiency, not on its right to foreclose. The delay in
commencing foreclosure proceedings bears a significant function in the deficiency amount being claimed, as the
amount undoubtedly includes interest and penalty charges which accrued during the period covered by the delay. The
depreciation of the mortgaged properties during the period of delay must also be factored in, as this affects the
proceeds that the mortgagee can recover in the foreclosure sale, which in turn affects its deficiency claim. There was
also, in this case, the four-year gap between the foreclosure proceedings and the filing of the complaint for deficiency
judgment during which time interest, whether at the 12% per annum rate or higher, and penalty charges also
accrued. For the Court to grant the PNBs deficiency claim would be to award it for its delay and its undisputed
disregard of PD 385.
The Award for Damages
Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. 31 The breach must
be wanton, reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of contract may give rise
to exemplary damages only if the guilty party acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner.32
We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in wanton disregard of its contractual
obligations, simply because it increased the interest rates and delayed the foreclosure of the mortgages. Bad faith
cannot be imputed simply because the defendant acted with bad judgment or with attendant negligence. Bad faith is
more than these; it pertains to a dishonest purpose, to some moral obliquity, or to the conscious doing of a wrong, a
breach of a known duty attributable to a motive, interest or ill will that partakes of the nature of fraud. 33Proof of actions
of this character is undisputably lacking in this case. Consequently, we do not find the spouses Rocamora entitled to
an award of moral and exemplary damages. Under these circumstances, neither should they recover attorneys fees
and litigation expense.34 These awards are accordingly deleted.
WHEREFORE, we DENY the petitioners petition for review on certiorari, and MODIFY the March 23, 2004 decision
of the Court of Appeals in CA-G.R. CV No. 66088 by DELETING the moral and exemplary damages, attorneys fees,
and litigation costs awarded to the respondents. All other aspects of the assailed decision areAFFIRMED. Costs
against the petitioner.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 164538

August 9, 2010

METROPOLITAN BANK and TRUST COMPANY, Petitioner,

vs.
ROGELIO REYNADO and JOSE C. ADRANDEA, ** Respondents.
DECISION
DEL CASTILLO, J.:
"It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by a compromise, for it
is a public offense which must be prosecuted and punished by the government on its own motion, even though
complete reparation [has] been made of the damage suffered by the private offended party. Since a criminal offense
like estafa is committed against the State, the private offended party may not waive or extinguish the criminal liability
that the law imposes for the commission of the crime." 1

69
This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of Appeals
(CAs) Decision2 dated October 21, 2002 in CA-G.R. SP No. 58548 and its further Resolution 3 dated July 12, 2004
denying petitioners Motion for Reconsideration. 4
Factual Antecedents
On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of the
City Prosecutor of Manila with the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the
affidavit5 of petitioners audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the
cash and lending operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by
respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that respondents were the
only voting members of the branchs credit committee authorized to extend credit accommodation to clients up
to P200,000.00; that through the so-called Bills Purchase Transaction, Universal, which has a paid-up capital of
only P125,000.00 and actual maintaining balance of P5,000.00, was able to make withdrawals
totaling P81,652,000.006 against uncleared regional checks deposited in its account at petitioners Port Area branch;
that, consequently, Universal was able to utilize petitioners funds even before the seven-day clearing period for
regional checks expired; that Universals withdrawals against uncleared regional check deposits were without prior
approval of petitioners head office; that the uncleared checks were later dishonored by the drawee bank for the
reason "Account Closed"; and, that respondents acted with fraud, deceit, and abuse of confidence.
In their defense, respondents denied responsibility in the anomalous transactions with Universal and claimed that
they only intended to help the Port Area branch solicit and increase its deposit accounts and daily transactions.
Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreement 7 whereby the
latter acknowledged its indebtedness to the former in the total amount of P50,990,976.278 as of February 4, 1997 and
undertook to pay the same in bi-monthly amortizations in the sum of P300,000.00 starting January 15, 1997, covered
by postdated checks, "plus balloon payment of the remaining principal balance and interest and other charges, if any,
on December 31, 2001."9
Findings of the Prosecutor
Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad (Prosecutor Edad) in her
Resolution10 dated July 10, 1997 found petitioners evidence insufficient to hold respondents liable for estafa.
According to Prosecutor Edad:
The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue that the liability is
criminal. Since the agreement was made even before the filing of this case, the relations between the parties [have]
change[d], novation has set in and prevented the incipience of any criminal liability on the part of respondents. 11
Thus, Prosecutor Edad recommended the dismissal of the case:
WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be dismissed. 12
On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department of Justice (DOJ) by
means of a Petition for Review.13
Ruling of the Department of Justice
On June 22, 1998, the DOJ dismissed the petition ratiocinating that:
It is evident that your client based on the same transaction chose to file estafa only against its employees and treat
with kid gloves its big time client Universal who was the one who benefited from this transaction and instead, agreed
that it should be paid on installment basis.
To allow your client to make the choice is to make an unwarranted classification under the law which will result in
grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this
transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein
respondents whose liabilities are based only on conspiracy with Universal.
Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated
the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored.
Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank
were duly notified of these transactions which they approved. Further, no damage was caused to your client as it
agreed [to] the settlement [with] Universal.14

70
A Motion for Reconsideration15 was filed by petitioner, but the same was denied on March 1, 2000 by then Acting
Secretary of Justice Artemio G. Tuquero.16
Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus.17
Ruling of the Court of Appeals
By Decision18 of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of Justice. Citing
jurisprudence19 wherein we ruled that while novation does not extinguish criminal liability, it may prevent the rise of
such liability as long as it occurs prior to the filing of the criminal information in court. 20 Hence, according to the CA,
"[j]ust as Universal cannot be held responsible under the bills purchase transactions on account of novation, private
respondents, who acted in complicity with the former, cannot be made liable [for] the same transactions." 21The CA
added that "[s]ince the dismissal of the complaint is founded on legal ground, public respondents may not be
compelled by mandamus to file an information in court."22
Incidentally, the CA totally ignored the Comment23 of the Office of the Solicitor General (OSG) where the latter, despite
being the statutory counsel of public respondent DOJ, agreed with petitioner that the DOJ erred in dismissing the
complaint. It alleged that where novation does not extinguish criminal liability for estafa neither does restitution negate
the offense already committed.24
Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other responsible individuals
in the complaint does not warrant its dismissal, suggesting that the proper remedy is to cause their inclusion in the
information.25 This notwithstanding, however, the CA disposed of the petition as follows:
WHEREFORE, the petition is DENIED due course and, accordingly, DISMISSED. Consequently, the resolutions
dated June 22, 1998 and March 1, 2000 of the Secretary of Justice are AFFIRMED.
SO ORDERED.26
Hence, this instant petition before the Court.
On November 8, 2004, we required27 respondents to file Comment, not a motion to dismiss, on the petition within 10
days from notice. The OSG filed a Manifestation and Motion in Lieu of Comment 28 while respondent Jose C.
Adraneda (Adraneda) submitted his Comment29 on the petition. The Secretary of Justice failed to file the required
comment on the OSGs Manifestation and Motion in Lieu of Comment and respondent Rogelio Reynado (Reynado)
did not submit any. For which reason, we issued a show cause order 30 on July 19, 2006. Their persistent noncompliance with our directives constrained us to resolve that they had waived the filing of comment and to impose a
fine of P1,000.00 on Reynado. Upon submission of the required memorandum by petitioner and Adraneda, the instant
petition was submitted for resolution.
Issues
Petitioner presented the following main arguments for our consideration:
1. Novation and undertaking to pay the amount embezzled do not extinguish criminal liability.
2. It is the duty of the public prosecutor to implead all persons who appear criminally liable for the offense
charged.
Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal did not absolve
private respondents from criminal liability for estafa. Petitioner submits that the settlement affects only the civil
obligation of Universal but did not extinguish the criminal liability of the respondents. Petitioner thus faults the CA in
sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing apparent error in the
appreciation and the application of the law on novation. By petitioners claim, citing Metropolitan Bank and Trust Co.
v. Tonda,31 the "negotiations pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution
for the offense already committed."32
In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on the sole responsibility
to his co-respondent Reynado as the latter was able to conceal the pertinent documents being the head of petitioners
Port Area branch. Nonetheless, he contends that because of the Debt Settlement Agreement, they cannot be held
liable for estafa.
The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the CA to give due course
to the petition contending that DOJ indeed erred in dismissing the complaint for estafa.

71
Given the facts of the case, the basic issue presented before this Court is whether the execution of the Debt
Settlement Agreement precluded petitioner from holding respondents liable to stand trial for estafa under Art. 315 (1)
(b) of the Revised Penal Code.33
Our Ruling
We find the petition highly meritorious.
Novation not a mode of extinguishing
criminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of contract.
Initially, it is best to emphasize that "novation is not one of the grounds prescribed by the Revised Penal Code for the
extinguishment of criminal liability." 34
In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise or novation of
contract. In Firaza v. People35 and Recuerdo v. People,36 this Court ruled that in a crime of estafa, reimbursement or
belated payment to the offended party of the money swindled by the accused does not extinguish the criminal liability
of the latter. We also held in People v. Moreno 37 and in People v. Ladera38 that "criminal liability for estafa is not
affected by compromise or novation of contract, for it is a public offense which must be prosecuted and punished by
the Government on its own motion even though complete reparation should have been made of the damage suffered
by the offended party." Similarly in the case of Metropolitan Bank and Trust Company v. Tonda 39 cited by petitioner, we
held that in a crime of estafa, reimbursement of or compromise as to the amount misappropriated, after the
commission of the crime, affects only the civil liability of the offender, and not his criminal liability.
Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the
commission of the crime does not extinguish accuseds liability for estafa. Neither will the same bar the prosecution of
said crime. Accordingly, in such a situation, as in this case, the complaint for estafa against respondents should not
be dismissed just because petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived
at the same conclusion:
Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and
Universal Converter Philippines extinguishes merely the civil aspect of the latters liability as a corporate entity but not
the criminal liability of the persons who actually committed the crime of estafa against petitioner Metrobank. x x x 40
Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the body of the assailed
Decision of the CA.
Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability.
Even if the instant case is viewed from the standpoint of the law on contracts, the disposition absolving the
respondents from criminal liability because of novation is still erroneous.
Under Article 1311 of the Civil Code, "contracts take effect only between the parties, their assigns and heirs, except in
case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation
or by provision of law." The civil law principle of relativity of contracts provides that "contracts can only bind the parties
who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted
with knowledge thereof."41
In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The intention of the parties
thereto not to include them is evident either in the onerous or in the beneficent provisions of said agreement. They are
not assigns or heirs of either of the parties. Not being parties to the agreement, respondents cannot take refuge
therefrom to bar their anticipated trial for the crime they committed. It may do well for respondents to remember that
the criminal action commenced by petitioner had its genesis from the alleged fraud, unfaithfulness, and abuse of
confidence perpetrated by them in relation to their positions as responsible bank officers. It did not arise from a
contractual dispute or matters strictly between petitioner and Universal. This being so, respondents cannot rely on
subject settlement agreement to preclude prosecution of the offense already committed to the end of extinguishing
their criminal liability or prevent the incipience of any liability that may arise from the criminal offense. This only
demonstrates that the execution of the agreement between petitioner and Universal has no bearing on the innocence
or guilt of the respondents.
Determination of the probable cause, a function belonging to the public prosecutor; judicial review allowed where it
has been clearly established that the prosecutor committed grave abuse of discretion.

72
In a preliminary investigation, a public prosecutor determines whether a crime has been committed and whether there
is probable cause that the accused is guilty thereof. 42 The Secretary of Justice, however, may review or modify the
resolution of the prosecutor.
"Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has
been committed and that the respondent is probably guilty thereof and should be held for trial." 43 Generally, a public
prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary investigation. By way of exception,
however, judicial review is allowed where respondent has clearly established that the prosecutor committed grave
abuse of discretion that is, when he has exercised his discretion "in an arbitrary, capricious, whimsical or despotic
manner by reason of passion or personal hostility, patent and gross enough as to amount to an evasion of a positive
duty or virtual refusal to perform a duty enjoined by law." 44 Tested against these guidelines, we find that this case falls
under the exception rather than the general rule.
A close scrutiny of the substance of Prosecutor Edads Resolution dated July 10, 1997 readily reveals that were it not
for the Debt Settlement Agreement, there was indeed probable cause to indict respondents for the crime charged.
From her own assessment of the Complaint-Affidavit of petitioners auditor, her preliminary finding is that "Ordinarily,
the offense of estafa has been sufficiently established." 45 Interestingly, she suddenly changed tack and declared that
the agreement altered the relation of the parties and that novation had set in preventing the incipience of any criminal
liability on respondents. In light of the jurisprudence herein earlier discussed, the prosecutor should not have gone
that far and executed an apparent somersault. Compounding further the error, the DOJ in dismissing petitioners
petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent portion of the ruling reads:
Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated
the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored.
Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank
were duly notified of these transactions which they approved. Further, no damage was caused to your client as it
agreed [to] the settlement [with] Universal.46
The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters of defense best left to
the trial courts deliberation and contemplation after conducting the trial of the criminal case. To emphasize, a
preliminary investigation for the purpose of determining the existence of probable cause is "not a part of the trial. A full
and exhaustive presentation of the parties evidence is not required, but only such as may engender a well-grounded
belief that an offense has been committed and that the accused is probably guilty thereof." 47 A "finding of probable
cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it
is believed that the act or omission complained of constitutes the offense charged." 48 So we held inBalangauan v.
Court of Appeals:49
Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the dismissal of the
criminal complaints for estafa and/or qualified estafa are determinative of whether or not it committed grave abuse of
discretion amounting to lack or excess of jurisdiction. In requiring "hard facts and solid evidence" as the basis for a
finding of probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the crime complained of, the
DOJ disregards the definition of probable cause that it is a reasonable ground of presumption that a matter is, or
may be, well-founded, such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution
and prudence to believe, or entertain an honest or strong suspicion, that a thing is so. The term does not mean
"actual and positive cause" nor does it import absolute certainty. It is merely based on opinion and reasonable belief;
that is, the belief that the act or omission complained of constitutes the offense charged. While probable cause
demands more than "bare suspicion," it requires "less than evidence which would justify conviction." Herein, the DOJ
reasoned as if no evidence was actually presented by respondent HSBC when in fact the records of the case were
teeming; or it discounted the value of such substantiation when in fact the evidence presented was adequate to excite
in a reasonable mind the probability that petitioners Bernyl and Katherene committed the crime/s complained of. In so
doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of discretion, which
rendered its resolutions amenable to correction and annulment by the extraordinary remedy of certiorari.
In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against respondents. As perused
by her, the facts as presented in the Complaint-Affidavit of the auditor are reasonable enough to excite her belief that
respondents are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas50 we had occasion to rule
that the "presence or absence of the elements of the crime is evidentiary in nature and is a matter of defense that
may be passed upon after a full-blown trial on the merits." 51
Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice committed grave abuse
of discretion in disposing of the case of petitioner, given the sufficiency of evidence on hand, we do not hesitate to
rule in the affirmative. We have previously ruled that grave abuse of discretion may arise when a lower court or
tribunal violates and contravenes the Constitution, the law or existing jurisprudence.
Non-inclusion of officers of Universal not a ground for the dismissal of the complaint.

73
The DOJ in resolving to deny petitioners appeal from the resolution of the prosecutor gave another ground failure
to implead the officers of Universal. It explained:
To allow your client to make the choice is to make an unwarranted classification under the law which will result in
grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this
transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein
respondents whose liabilities are based only on conspiracy with Universal. 521avvphi1
The ratiocination of the Secretary of Justice conveys the idea that if the charge against respondents rests upon the
same evidence used to charge co-accused (officers of Universal) based on the latters conspiratorial participation, the
non-inclusion of said co-accused in the charge should benefit the respondents.
The reasoning of the DOJ is flawed.
Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who must be charged with
what crime or for what offense. Public prosecutors, not the private complainant, are the ones obliged to bring forth
before the law those who have transgressed it.
Section 2, Rule 110 of the Rules of Court53 mandates that all criminal actions must be commenced either by complaint
or information in the name of the People of the Philippines against all persons who appear to be responsible therefor.
Thus the law makes it a legal duty for prosecuting officers to file the charges against whomsoever the evidence may
show to be responsible for the offense. The proper remedy under the circumstances where persons who ought to be
charged were not included in the complaint of the private complainant is definitely not to dismiss the complaint but to
include them in the information. As the OSG correctly suggested, the proper remedy should have been the inclusion
of certain employees of Universal who were found to have been in cahoots with respondents in defrauding petitioner.
The DOJ, therefore, cannot seriously argue that because the officers of Universal were not indicted, respondents
themselves should not likewise be charged. Their non-inclusion cannot be perversely used to justify desistance by the
public prosecutor from prosecution of the criminal case just because not all of those who are probably guilty thereof
were charged.
Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of discretion.
Mandamus is a remedial measure for parties aggrieved. It shall issue when "any tribunal, corporation, board, officer or
person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an
office, trust or station."54 The writ of mandamus is not available to control discretion neither may it be issued to compel
the exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to determine which persons
appear responsible for the commission of a crime. However, the moment he finds one to be so liable it becomes his
inescapable duty to charge him therewith and to prosecute him for the same. In such a situation, the rule loses its
discretionary character and becomes mandatory. Thus, where, as in this case, despite the sufficiency of the evidence
before the prosecutor, he refuses to file the corresponding information against the person responsible, he abuses his
discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary of Justice, on
the other hand, gravely abused his discretion when, despite the existence of sufficient evidence for the crime of estafa
as acknowledged by the investigating prosecutor, he completely ignored the latters finding and proceeded with the
questioned resolution anchored on purely evidentiary matters in utter disregard of the concept of probable cause as
pointed out in Balangauan. To be sure, findings of the Secretary of Justice are not subject to review unless shown to
have been made with grave abuse.55The present case calls for the application of the exception. Given the facts of this
case, petitioner has clearly established that the public prosecutor and the Secretary of Justice committed grave abuse
of discretion.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 58548
promulgated on October 21, 2002 affirming the Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary
of Justice, and its Resolution dated July 12, 2004 denying reconsideration thereon are herebyREVERSED and SET
ASIDE. The public prosecutor is ordered to file the necessary information for estafa against the respondents.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 175994

December 8, 2009

74
JESUS CAMPOS and ROSEMARIE CAMPOS-BAUTISTA, Petitioners,
vs.
NENITA BUENVENIDA PASTRANA, ROGER BUENVENIDA, SONIA BUENVENIDA,TEDDY BUENVENIDA,
VICTOR BUENVENIDA, HARRY BUENVENIDA, MILDRED BUENVENIDA, MANOLITO BUENVENIDA and DAISY
BUENVENIDA, represented by their Attorney-in-Fact CARLITO BUENVENIDA, *** Respondents.
DECISION
DEL CASTILLO, J.:
It sometimes happens that a creditor, after securing a judgment against a debtor, finds that the debtor had transferred
all his properties to another leaving nothing to satisfy the obligation to the creditor. In this petition for review
on certiorari,1 petitioners ask us to set aside the November 23, 2005 Decision 2 of the Court of Appeals (CA) in CAG.R. CV No. 68731 declaring as null the sale of several parcels of land made by their parents in their favor, for being
absolutely simulated transactions. Also assailed is the November 21, 2006 Resolution. 3
Factual antecedents
This is the third case between essentially the same parties and the second among those cases to reach this Court on
appeal, spanning a period of close to three decades.
The first case arose from the refusal of Carlito Campos (Carlito), the father of herein petitioners, to surrender the
possession of a fishpond he leased from respondents mother, Salvacion Buenvenida, despite the expiration of their
contract of lease in 1980. Alleging that he was an agricultural lessee, Carlito filed an agrarian case docketed as CAR
Case No. 1196 (Agrarian Case) against his lessor. After trial, the Regional Trial Court of Roxas City, Branch 14, found
that Carlito was not an agricultural tenant. He then appealed to the CA and subsequently to this Court, but was
unsuccessful.
While the appeal in the Agrarian Case was pending before the CA, herein respondents filed the second case, Civil
Case No. V-5417, against Carlito for Recovery of Possession and Damages with Preliminary Mandatory Injunction
(Possession Case) involving the same fishpond subject of the earlier agrarian case. On November 27, 1990, the
Regional Trial Court of Roxas City, Branch 16, rendered a Decision 4 finding Carlito to have retained possession of the
fishpond notwithstanding the expiration of the contract of lease and ordering him to pay rentals, the value of the
produce and damages to the herein respondents. The Decision became final and executory and a Writ of
Execution5 was issued on February 7, 1995. Subsequently, on September 19, 1995, an Alias Writ of Execution 6was
also issued. Both were returned unsatisfied as per Sheriffs Return of Service dated November 14, 1995.
During the pendency of the Agrarian Case, as well as prior to the filing of the Possession Case, Carlito was the
registered owner of the following properties:
1. Residential Lots 3715-A and 3715-B-2 covered by Transfer Certificates of Title Nos. 18205 7 and
18417,8respectively and
2. Agricultural Lots 850 and 852 covered by Original Certificates of Title
Nos. P-91999 and P-9200,10 respectively.
When the respondents were about to levy these properties to satisfy the judgment in the Possession Case, they
discovered that spouses Carlito and Margarita Campos transferred these lots to their children Rosemarie and Jesus
Campos, herein petitioners, by virtue of Deeds of Absolute Sale dated October 18, 1985 11 and November 2,
1988.12 Specifically, spouses Campos sold the residential lots (Lots 3715-A and 3715-B-2), with a total area of 1,393
square meters, to their daughter Rosemarie for P7,000.00 and the agricultural lots (Lots 850 and 852) with a
combined area of 7,972 square meters, to their son Jesus for P5,600.00.
Proceedings before the Regional Trial Court
Civil Case No. V-7028
On February 18, 1997, respondents instituted the third case, Civil Case No.
V-7028 (Nullity of Sale Case),13 subject of this appeal, seeking to declare as null the aforesaid deeds of sale and the
transfer certificates of title issued pursuant thereto. They alleged that the contracts of sale between spouses Campos
and petitioners were simulated for the sole purpose of evading the levy of the abovementioned properties in
satisfaction of a money judgment that might be rendered in the Possession Case.

75
In their Answer with Counterclaim, 14 spouses Campos and petitioners averred that Rosemarie and Jesus Campos
acquired the lots in question in good faith and for value because they were sold to them before they had any notice of
the claims or interests of other persons thereover.
On August 21, 2000, the Regional Trial Court of Roxas City, Branch 14, dismissed the complaint. 15 It held that
In the Resolution of this case the issue is whether or not the spouses Carlito Campos and Margarita Arduo, sensing
that an unfavorable judgment might be rendered against them in Civil Case No. V-5417 filed in Branch 16 on July 17,
1987 by the same plaintiffs for Recovery of Possession and Damages with Preliminary Mandatory Injunction, in
evident bad faith and wanton disregard of the law, maliciously and fraudulently, executed a purely fictitious and
simulated sale of their properties thereby ceding and transferring their ownership thereto to their children Rosemarie
Campos-Bautista and Jesus Campos.
A close scrutiny of the defendants documentary exhibits and testimonies showed that as early as 1981 defendant
Jesus Campos was already leasing a fishpond in Brgy. Majanlud, Sapi-an, Capiz from Victorino Jumpay and
defendant Rosemarie Campos was engaged in the sari-sari store business starting 1985 so that they were able to
purchase the properties of their parents out of their profits derived therefrom.
The Deed of Absolute Sale (Exh. "6" & "10") executed by the spouses Carlito Campos and Margarita Arduo to
Rosemarie Campos and Jesus Campos were dated October 17, 1985 and November 2, 1988, respectively.
It can readily [be] gleaned from the records that Civil Case No. V-5417 was filed on July 7, 1987 and was decided on
November 27, 1990. Furthermore, the alias writ of execution was issued only on July 5, 1995 for which the Sheriffs
Return of Service was returned unsatisfied on November 14, 1995.
WHEREFORE, the complaint of the plaintiffs against the defendants is DISMISSED. Their claim for damages is
likewise DISMISSED. The counter-claim of the defendants must also be DISMISSED as the case was not filed in
evident bad faith and with malicious intent.
SO ORDERED.16
Proceedings before the Court of Appeals
Upon review of the evidence presented, the CA found that the conveyances were made in 1990, and not in 1985 or
1988, or just before their actual registration with the Registry of Deeds, evidently to avoid the properties from being
attached or levied upon by the respondents. The CA likewise noted that the zonal value of the subject properties were
much higher than the value for which they were actually sold. The appellate court further observed that despite the
sales, spouses Campos retained possession of the properties in question. Finally, the CA took note of the fact that the
writ of execution and alias writ issued in the Possession Case remained unsatisfied as the lower court could not find
any other property owned by the spouses Campos that could be levied upon to satisfy its judgment, except the
parcels of land subject of the assailed transactions.
On these bases, the CA ruled that the assailed contracts of sale were indeed absolutely simulated transactions and
declared the same to be void ab initio. The dispositive portion of the Decision of the CA reads:
WHEREFORE, the instant appeal is GRANTED. The decision of the Regional Trial Court of Roxas City, Branch 14,
dated August 21, 2000 in Civil Case No. V-7028 is REVERSED and SET ASIDE. Let a copy of this Decision be
furnished to the Register of Deeds of the Province of Capiz who is hereby ordered to cancel Transfer Certificates of
Title Nos. T-26092 and T-26093 in the name of Rosemarie Campos, and Transfer Certificates of Title Nos. T-23248
and 23249 in the name of Jesus Campos and restore said titles in the name of the previous owner, Carlito Campos.
SO ORDERED.
Only petitioners moved for reconsideration 17 but the CA denied the same.18
Issues
Hence, this petition for review on certiorari raising the following errors:
I.
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW IN APPLYING ARTICLE 1409, CIVIL CODE,
INSTEAD OF ARTIcLE 1381 (3), CIVIL CODE, AND IN SPECULATING THAT A CAUSE OF ACTION OF SUPPOSED
SALE IN FRAUD OF CREDITORS EXISTS DESPITE NON-EXHAUSTION OF REMEDIES TO ENFORCE THE
JUDGMENT IN CIVIL CASE NO. V-5417.

76
II.
THE COURT OF APPEALS COMMITTED AN ERROR OF LAW OVERLOOKING THAT THE CAUSE OF ACTION
HAD PRESCRIBED, THE COMPLAINT HAVING BEEN FILED AFTER SEVEN (7) YEARS OR ONLY ON 14
OCTOBER 1997, FROM THE TIME THE TITLES WERE ISSUED IN 1990.
III.
THE COURT OF APPEALS ERRONEOUSLY ANCHORED ITS IMPUGNED JUDGMENT ON MISAPPREHENSION
OF FACTS THAT THE SALE WERE ANTEDATED, HENCE SIMULATED DESPITE GLARING ABSENCE OF
EVIDENCE IN SUPPORT THEREOF.
IV.
THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN CASTING ASIDE OVERWHELMING
EVIDENCE DULY APPRECIATED BY THE TRIAL COURT THAT PETITIONERS ARE BUYERS IN GOOD FAITH
AND FOR VALUE, WHO EXERCISED DOMINION OVER THE SUBJECT LOTS, WHICH IF PROPERLY
CONSIDERED, SHALL WARRANT THE SINGULAR CONCLUSION THAT THE SALE AND TRANSFER OF TITLES
ARE VALID.19
Petitioners arguments
Petitioners assail the application of Article 140920 of the Civil Code on void
contracts as against Article 1381(3) 21 of the Civil Code on rescissible contracts in fraud of creditors, considering that
the questioned conveyances executed by the spouses Campos to their children were allegedly done to evade the
enforcement of the writ of execution in the Possession Case. 22 In addition, petitioners allege that the CA
misappreciated the facts of this case when it found that the questioned transactions were tainted with badges of
fraud.23
Respondents arguments
Respondents argue that the application of Article 1409 on void contracts was a natural and logical consequence of
the CAs finding that subject deeds of sale were absolutely simulated and fictitious, consistent with the nature of the
respondents cause of action which was for declaration of nullity of said contracts and the transfer certificates of titles
issued pursuant thereto.24 Respondents also stressed that the CAs finding is conclusive upon us and that only
questions of law may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court.25
Our Ruling
The petition lacks merit.
Well-settled is the rule that this Court is not a trier of facts. When supported by substantial evidence, the findings of
fact of the CA are conclusive and binding, and are not reviewable by this Court, unless the case falls under any of the
following recognized exceptions:
(1) When the conclusion is a finding grounded entirely on speculation, surmises and conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misappreciation of facts;
(5) When the findings of fact are conflicting;
(6) When the CA in making its findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee;
(7) When the findings are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on which they are based;
(9) When the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed
by the respondents; and

77
(10) When the findings of fact of the CA are premised on the supposed absence of evidence and contradicted
by the evidence on record.
None of these exceptions is present in this case. We find that the Decision of the CA is supported by the required
quantum of evidence.
The subject Deeds of Absolute Sale executed by the Spouses Campos to their children (herein petitioners) are
absolutely simulated and fictitious.
The CA correctly held that the assailed Deeds of Absolute Sale were executed when the Possession Case was
already pending, evidently to avoid the properties subject thereof from being attached or levied upon by the
respondents. While the sales in question transpired on October 18, 1985 and November 2, 1988, as reflected on the
Deeds of Absolute Sale, the same were registered with the Registry of Deeds only on October 25, 1990 and
September 25, 1990.
We also agree with the findings of the CA that petitioners failed to explain the reasons for the delay in the registration
of the sale, leading the appellate court to conclude that the conveyances were made only in 1990 or sometime just
before their actual registration and that the corresponding Deeds of Absolute Sale were antedated. This conclusion is
bolstered by the fact that the supposed notary public before whom the deeds of sale were acknowledged had no valid
notarial commission at the time of the notarization of said documents. 26
Indeed, the Deeds of Absolute Sale were executed for the purpose of putting the lots in question beyond the reach of
creditors. First, the Deeds of Absolute Sale were registered exactly one month apart from each other and about
another one month from the time of the promulgation of the judgment in the Possession Case. The Deeds of Absolute
Sale were antedated and that the same were executed when the Possession Case was already pending.
Second, there was a wide disparity in the alleged consideration specified in the Deeds of Absolute Sale and the actual
zonal valuation of the subject properties as per the BIR Certification, as follows:
Consideration
Market Value as
specified in Deed
per Tax
of Absolute Sale
Declaration

Computed Zonal
Valuation (BIR
Certification)

Residential Lots:
From Spouses
Campos to daughter,
Rosemarie Campos

P 7,000.00

P 83,580.0027

P 417,900.0028

Agricultural Lots:
From Spouses
Campos to son,
Jesus Campos

P 5,600.00

P 25,000.1929

P 39,860.0030

As correctly noted by the CA, the appraised value of the properties subject of this controversy may be lower at the
time of the sale in 1990 but it could not go lower than P7,000.00 and P5,600.00. We likewise find the considerations
involved in the assailed contracts of sale to be inadequate considering the market values presented in the tax
declaration and in the BIR zonal valuation.
Third, we cannot believe that the buyer of the 1,393-square meter 31 residential land could not recall the exact area of
the two lots she purchased. In her cross-examination, petitioner Rosemarie Campos stated:
Q: Can you tell us the total area of those two (2) lots that they sold to you?
A: It consists of One Thousand (1,000) Square Meters. 32
xxxx
Q: By the way, for how much did you buy this [piece] of land consisting of 1,000 square meters?
A: Seven Thousand Pesos (P7,000.00) Your Honor.33
Fourth, it appears on record that the money judgment in the Possession Case has not been discharged with. Per
Sheriffs Service Return dated November 14, 1995, the Alias Writ of Execution and Sheriffs Demand for Payment
dated September 19, 1995 remain unsatisfied.

78
Finally, spouses Campos continue to be in actual possession of the properties in question. Respondents have
established through the unrebutted testimony of Rolando Azoro that spouses Campos have their house within Lot
3715-A and Lot 3715-B-2 and that they reside there together with their daughter Rosemarie. 34 In addition, spouses
Campos continued to cultivate the rice lands which they purportedly sold to their son Jesus. 35 Meantime, Jesus, the
supposed new owner of said rice lands, has relocated to Bulacan 36 where he worked as a security guard.37 In other
words, despite the transfer of the said properties to their children, the latter have not exercised complete dominion
over the same. Neither have the petitioners shown if their parents are paying rent for the use of the properties which
they already sold to their children.
In Suntay v. Court of Appeals,38 we held that:
The failure of the late Rafael to take exclusive possession of the property allegedly sold to him is a clear badge of
fraud. The fact that, notwithstanding the title transfer, Federico remained in actual possession, cultivation and
occupation of the disputed lot from the time the deed of sale was executed until the present, is a circumstance which
is unmistakably added proof of the fictitiousness of the said transfer, the same being contrary to the principle of
ownership.
While in Spouses Santiago v. Court of Appeals,39 we held that "the failure of petitioners to take exclusive possession
of the property allegedly sold to them, or in the alternative, to collect rentals from the alleged vendor x x x is contrary
to the principle of ownership and a clear badge of simulation that renders the whole transaction void and without force
and effect, pursuant to Article 1409 of the Civil Code".
The issuance of transfer certificates of title to petitioners did not vest upon them ownership of the properties.
The fact that petitioners were able to secure titles in their names did not operate to vest upon them ownership over
the subject properties. That act has never been recognized as a mode of acquiring ownership. 40 The Torrens system
does not create or vest title. It only confirms and records title already existing and vested. It does not protect a
usurper from the true owner. It cannot be a shield for the commission of fraud. 41
In the instant case, petitioner Rosemarie Campos supposedly bought the residential properties in 1985 but did not
have the assailed Deed of Absolute Sale registered with the proper Registry of Deeds for more than five years, or
until a month before the promulgation of the judgment in the Possession Case. Hence, we affirm the finding of the CA
that the purported deed was antedated. Moreover, her failure to take exclusive possession of the property allegedly
sold, or, alternatively, to collect rentals is contrary to the principle of ownership and a clear badge of simulation. On
these grounds, we cannot hold that Rosemarie Campos was an innocent buyer for value.
Likewise, petitioner Jesus Campos supposedly bought the rice land from his parents in 1988 but did not have the
assailed Deed of Absolute Sale registered with the proper Registry of Deeds for more than two years, or until two
months before the promulgation of the judgment in the Possession Case. Thus, we likewise affirm the finding of the
CA that the purported deed was antedated. In addition, on cross, he confirmed that he had knowledge of the prior
pending cases when he supposedly purchased his parents rice land stating that:
Q: You never knew that your parents and the plaintiffs in this case have cases in the past prior to this case
now, is that right?
A: Yes, sir. I knew about it.
Q: And in spite of your knowledge, that there was a pending case between your parents and the plaintiffs
here, you still purchased these two (2) lots 850 and 852 from your parents, is that what you are telling us?
A: All I knew was that, that case was a different case from the subject matter then [sic] the lot now in
question.42
On these findings of fact, petitioner Jesus Campos cannot be considered as an innocent buyer and for value.
Since both the transferees, Rosemarie and Jesus Campos, are not innocent purchasers for value, the subsequent
registration procured by the presentation of the void deeds of absolute sale is likewise null and void.
The action for the declaration of the inexistence of the assailed Deeds of Absolute Sale does not prescribe.
Petitioners argue that respondents cause of action had prescribed when they filed the Nullity of the Sale Case on
October 14, 1997, or seven years after the registration of the questioned sales in 1990.1avvphi1
We cannot agree. As discussed above, the sale of subject properties to herein petitioners are null and void. And
under Article 1410 of the Civil Code, an action or defense for the declaration of the inexistence of a contract is

79
imprescriptible. Hence, petitioners contention that respondents cause of action is already barred by prescription is
without legal basis.
Since the assailed Deeds of Absolute Sale are null and void, the Civil Code provisions on rescission have no
application in the instant case.
Finally, petitioners argument that the applicable law in this case is Article 1381(3) of the Civil Code on rescissible
contracts and not Article 1409 on void contracts is not a question of first impression. This issue had already been
settled several decades ago when we held that "an action to rescind is founded upon and presupposes the existence
of a contract".43 A contract which is null and void is no contract at all and hence could not be the subject of
rescission.44
In the instant case, we have declared the Deeds of Absolute Sale to be fictitious and inexistent for being absolutely
simulated contracts. It is true that the CA cited instances that may constitute badges of fraud under Article 1387 of the
Civil Code on rescissible contracts. But there is nothing else in the appealed decision to indicate that rescission was
contemplated under the said provision of the Civil Code. The aforementioned badges must have been considered
merely as grounds for holding that the sale is fictitious. Consequently, we find that the CA properly applied the
governing law over the matter under consideration which is Article 1409 of the Civil Code on void or inexistent
contracts.
WHEREFORE, the petition is DENIED. Costs against petitioners.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 119850 June 20, 1996

MANDARIN VILLA, INC., petitioner,
vs.
COURT OF APPEALS, and CLODUALDO DE JESUS, respondents.
RESOLUTION

FRANCISCO, J.:p
With ample evidentiary support are the following antecedent facts:
In the evening of October 19, 1989, private respondent, Clodualdo de Jesus, a practicing lawyer and businessman,
hosted a dinner for his friends at the petitioner's restaurant, the Mandarin Villa Seafoods Village Greenhills,
Mandaluyong City. After dinner the waiter handed to him the bill in the amount of P2,658.50. Private respondent
offered to pay the bill through his credit card issued by Philippine Commercial Credit Card Inc. (BANKARD). This card
was accepted by the waiter who immediately proceeded to the restaurant's cashier for card verification. Ten minutes
later, however, the waiter returned and audibly informed private respondent that his credit card had expired. 1 Private
respondent remonstrated that said credit card had yet to expire on September 1990, as embossed on its face. 2 The
waiter was unmoved, thus, private respondent and two of his guests approached the restaurant's cashier who again
passed the credit card over the verification computer. The same information was produced, i.e., CARD EXPIRED.
Private respondent and his guests returned to their table and at this juncture, Professor Lirag, another guest, uttered
the following remarks: "Clody [referring to Clodualdo de Jesus], may problema ba? Baka kailangang maghugas na
kami ng pinggan?" 3 Thereupon, private respondent left the restaurant and got his BPI Express Credit Card from his
car and offered it to pay their bill. This was accepted and honored by the cashier after verification. 4 Petitioner and his
companions left afterwards.
The incident triggered the filing of a suit for damages by private respondent. Following a full-dress trial, judgment was
rendered directing the petitioner and BANKARD to pay jointly and severally the private respondent: (a) moral

80
damages in the amount of P250,000.00; (b) exemplary damages in the amount of P100,000.00, and (c) attorney's
fees and litigation expenses in the amount of P50,000.00.
Both the petitioner and BANKARD appealed to the respondent Court of Appeals which rendered a decision, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED by:
1. Finding appellant MANDARIN solely responsible for damages in favor of appellee;
2. Absolving appellant BANKARD of any responsibility for damages;
3. Reducing moral damages awarded to appellee to TWENTY FIVE THOUSAND and 00/100
(P25,000.00) PESOS;
4. Reducing exemplary damages awarded to appellee to TEN THOUSAND and 00/100 (P10,000.00)
PESOS;
5. Reversing and setting aside the award of P250,000.00 for attorney's fees as well as interest
awarded, and
6. AFFIRMING the dismissal of all counterclaims and cross-claims.
Costs against appellant Mandarin.
SO ORDERED. 5
Mandarin Villa, thus, interposed this present petition, faulting the respondent court with six (6) assigned errors which
may be reduced to the following issues, to wit: (1) whether or not petitioner is bound to accept payment by means of
credit card; (2) whether or not petitioner is negligent under the circumstances obtaining in this case; and (3) if
negligent, whether or not such negligence is the proximate cause of the private respondent's damage.
Petitioner contends that it cannot be faulted for its cashier's refusal to accept private respondent's BANKARD credit
card, the same not being a legal tender. It argues that private respondent's offer to pay by means of credit card
partook of the nature of a proposal to novate an existing obligation for which petitioner, as creditor, must first give its
consent otherwise there will be no binding contract between them. Petitioner cannot seek refuge behind this
averment.
We note that Mandarin Villa Seafood Village is affiliated with BANKARD. In fact, an "Agreement" 6 entered into by
petitioner and BANKARD dated June 23, 1989, provides inter alia:
The MERCHANT shall honor validly issued PCCCI credit cards presented by their corresponding
holders in the purchase of goods and/or services supplied by it provided that the card expiration date
has not elapsed and the card number does not appear on the latest cancellation bulletin of lost,
suspended and canceled PCCCI credit cards and, no signs of tampering, alterations or irregularities
appear on the face of the credit card. 7
While private respondent, may not be a party to the said agreement, the above-quoted stipulation conferred a favor
upon the private respondent, a holder of credit card validly issued by BANKARD. This stipulation is a stipulation pour
autri and under Article 1311 of the Civil Code private respondent may demand its fulfillment provided he
communicated his acceptance to the petitioner before its revocation. 8 In this case, private respondent's offer to pay
by means of his BANKARD credit card constitutes not only an acceptance of the said stipulation but also an explicit
communication of his acceptance to the obligor.
In addition, the record shows that petitioner posted a logo inside Mandarin Villa Seafood Village stating that "Bankard
is accepted here. 9 This representation is conclusive upon the petitioner which it cannot deny or disprove as against
the private respondent, the party relying thereon. Petitioner, therefore, cannot disclaim its obligation to accept private
respondent's BANKARD credit card without violating the equitable principle of estoppel. 10
Anent the second issue, petitioner insists that it is not negligent. In support thereof, petitioner cites its good faith in
checking, not just once but twice, the validity of the aforementioned credit card prior to its dishonor. It argues that
since the verification machine flashed an information that the credit card has expired, petitioner could not be expected
to honor the same much less be adjudged negligent for dishonoring it. Further, petitioner asseverates that it only
followed the guidelines and instructions issued by BANKARD in dishonoring the aforementioned credit card. The
argument is untenable.

81
The test for determining the existence of negligence in a particular case may be stated as follows: Did the defendant
in doing the alleged negligent act use the reasonable care and caution which an ordinary prudent person would have
used in the same situation? If not, then he is guilty of negligence. 11 The Point of Sale (POS) Guidelines which
outlined the steps that petitioner must follow under the circumstances provides.
xxx xxx xxx
CARD EXPIRED
a. Check expiry date on card.
b. If unexpired, refer to CB.
b.1. If valid, honor up to maximum of SPL only.
b.2. If in CB as Lost, do procedures 2a to 2e.,
b.3. If in CB as Suspended/Cancelled, do not honor card.
c. If expired, do not honor card. 12
A cursory reading of said rule reveals that whenever the words CARD EXPIRED flashes on the screen of the
verification machine, petitioner should check the credit card's expiry date embossed on the card itself. If unexpired,
petitioner should honor the card provided it is not invalid, cancelled or otherwise suspended. But if expired, petitioner
should not honor the card. In this case, private respondent's BANKARD credit card has an embossed expiry date of
September 1990. 13 Clearly, it has not yet expired on October 19, 1989, when the same was wrongfully dishonored by
the petitioner. Hence, petitioner did not use the reasonable care and caution which an ordinary prudent person would
have used in the same situation and as such petitioner is guilty of negligence. In this connection, we quote with
approval the following observations of the respondent Court.
Mandarin argues that based on the POS Guidelines (supra), it has three options in case the
verification machine flashes "CARD EXPIRED". It chose to exercise option (c) by not honoring
appellee's credit card. However, appellant apparently intentionally glossed over option "(a) Check
expiry date on card" (id.) which would have shown without any shadow of doubt that the expiry date
embossed on the BANKARD was "SEP 90". (Exhibit "D".) A cursory look at the appellee's BANKARD
would also reveal that appellee had been as of that date a cardholder since 1982, a fact which would
have entitled the customer the courtesy of better treatment. 14
Petitioner, however, argues that private respondent's own negligence in not bringing with him sufficient cash was the
proximate cause of his damage. It likewise sought exculpation by contending that the remark of Professor Lirag 15 is a
supervening event and at the same time the proximate cause of private respondent's injury.
We find this contention also devoid of merit. While it is true that private respondent did not have sufficient cash on
hand when he hosted a dinner at petitioner's restaurant, this fact alone does not constitute negligence on his part.
Neither can it be claimed that the same was the proximate cause of private respondent's damage. We take judicial
notice 16 of the current practice among major establishments, petitioner included, to accept payment by means of
credit cards in lieu of cash. Thus, petitioner accepted private respondent's BPI Express Credit Card after verifying its
validity, 17 a fact which all the more refutes petitioner's imputation of negligence on the private respondent.
Neither can we conclude that the remark of Professor Lirag was a supervening event and the proximate cause of
private respondent's injury. The humiliation and embarrassment of the private respondent was brought about not by
such a remark of Professor Lirag but by the fact of dishonor by the petitioner of private respondent's valid BANKARD
credit card. If at all, the remark of Professor Lirag served only to aggravate the embarrassment then felt by private
respondent, albeit silently within himself.
WHEREFORE, the instant petition is hereby DISMISSED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

82
THIRD DIVISION
G.R. No. 163663

June 30, 2006

GREATER METROPOLITAN MANILA SOLID WASTE MANAGEMENT COMMITTEE and the METROPOLITAN
MANILA DEVELOPMENT AUTHORITY, Petitioners,
vs.
JANCOM ENVIRONMENTAL CORPORATION and JANCOM INTERNATIONAL DEVELOPMENT PROJECTS PTY.
LIMITED OF AUSTRALIA, Respondents.
DECISION
CARPIO MORALES, J.:
The present petition for review on certiorari challenges the Decision 1 dated December 19, 2003 and Resolution2dated
May 11, 2004 of the Court of Appeals (CA)3 in CA-G.R. SP No. 78752 which denied the petition for certiorari filed by
herein petitioners Greater Metropolitan Manila Solid Waste Management Committee (GMMSWMC) and the
Metropolitan Manila Development Authority (MMDA) and their Motion for Reconsideration, respectively.
In 1994, Presidential Memorandum Order No. 202 was issued by then President Fidel V. Ramos creating an
Executive Committee to oversee and develop waste-to-energy projects for the waste disposal sites in San Mateo,
Rizal and Carmona, Cavite under the Build-Operate-Transfer (BOT) scheme.
Respondent Jancom International Development Projects Pty. Limited of Australia (Jancom International) was one of
the bidders for the San Mateo Waste Disposal Site. It subsequently entered into a partnership with Asea Brown Boveri
under the firm name JANCOM Environmental Corporation (JANCOM), its co-respondent.
On February 12, 1997, the above-said Executive Committee approved the recommendation of the Pre-qualification,
Bids and Awards Committee to declare JANCOM as the sole complying bidder for the San Mateo Waste Disposal
Site.
On December 19, 1997, a Contract for the BOT Implementation of the Solid Waste Management Project for the San
Mateo, Rizal Waste Disposal Site4 (the contract) was entered into by the Republic of the Philippines, represented by
the Presidential Task Force on Solid Waste Management through then Department of Environment and Natural
Resources Secretary Victor Ramos, then Cabinet Office for Regional Development-National Capital Region Chairman
Dionisio dela Serna, and then MMDA Chairman Prospero Oreta on one hand, and JANCOM represented by its Chief
Executive Officer Jorge Mora Aisa and its Chairman Jay Alparslan, on the other.
On March 5, 1998, the contract was submitted for approval to President Ramos who subsequently endorsed it to then
incoming President Joseph E. Estrada.
Owing to the clamor of the residents of Rizal, the Estrada administration ordered the closure of the San Mateo landfill.
Petitioner GMMSWMC thereupon adopted a Resolution not to pursue the contract with JANCOM, citing as reasons
therefor the passage of Republic Act 8749, otherwise known as the Clean Air Act of 1999, the non-availability of the
San Mateo site, and costly tipping fees.5
The Board of Directors of Jancom International thereafter adopted on January 4, 2000 a Resolution 6 authorizing Atty.
Manuel Molina to act as legal counsel for respondents and "determine and file such legal action as deemed
necessary before the Philippine courts in any manner he may deem appropriate" against petitioners.
The Board of Directors of JANCOM also adopted a Resolution 7 on February 7, 2000 granting Atty. Molina similar
authorization to file legal action as may be necessary to protect its interest with respect to the contract.
On March 14, 2000, respondents filed a petition for certiorari 8 with the Regional Trial Court (RTC) of Pasig City where
it was docketed as Special Civil Action No. 1955, to declare the GMMSWMC Resolution and the acts of the MMDA
calling for bids for and authorizing the forging of a new contract for the Metro Manila waste management as illegal,
unconstitutional and void and to enjoin petitioners from implementing the Resolution and making another award in lieu
thereof.
By Decision9 of May 29, 2000, Branch 68 of the Pasig City RTC found in favor of respondents. 10
Petitioners thereupon assailed the RTC Decision via petition for certiorari 11 with prayer for a temporary restraining
order with the CA, docketed as CA-G.R. SP No. 59021.

83
By Decision12 of November 13, 2000, the CA denied the petition for lack of merit and affirmed in toto the May 29, 2000
RTC Decision. Petitioners Motion for Reconsideration was denied, prompting them to file a petition for review before
this Court, docketed as G.R. No. 147465.
By Decision13 of January 30, 2002 and Resolution 14 of April 10, 2002, this Court affirmed the November 13, 2001 CA
Decision and declared the contract valid and perfected, albeit ineffective and unimplementable pending approval by
the President.
JANCOM and the MMDA later purportedly entered into negotiations to modify certain provisions of the contract which
were embodied in a draft Amended Agreement15 dated June 2002. The draft Amended Agreement bore no signature
of the parties.
Respondents, through Atty. Molina, subsequently filed before Branch 68 of the Pasig City RTC an Omnibus
Motion16 dated July 29, 2002 praying that: (1) an alias writ of execution be issued prohibiting and enjoining petitioners
and their representatives from calling for, accepting, evaluating, approving, awarding, negotiating or implementing all
bids, awards and contracts involving other Metro Manila waste management projects intended to be pursued or which
are already being pursued; (2) the MMDA, through its Chairman Bayani F. Fernando, be directed to immediately
forward and recommend the approval of the Amended Agreement to President Gloria Macapagal Arroyo; (3)
Chairman Fernando be ordered to personally appear before the court and explain his acts and public
pronouncements which are in direct violation and gross defiance of the final and executory May 29, 2000 RTC
Decision; (4) the Executive Secretary and the Cabinet Secretaries of the departments-members of the National Solid
Waste Management Commission be directed "to submit the contract within 30 days from notice to the President for
signature and approval and if the latter chooses not to sign or approve the contract, the Executive Secretary be made
to show cause therefor;" and (5) petitioners be directed to comply with and submit their written compliance with their
obligations specifically directed under the provisions of Article 18, paragraphs 18.1, 18.1.1 (a), (b), (c) and (d) of the
contract within 30 days from notice. 17
To the Omnibus Motion petitioners filed their Opposition 18 which merited JANCOMs Reply19 filed on August 19, 2002.
On August 21, 2002, Atty. Simeon M. Magdamit, on behalf of Jancom International, filed before the RTC an Entry of
Special Appearance and Manifestation with Motion to Reject the Pending Omnibus Motion 20 alleging that: (1) the
Omnibus Motion was never approved by Jancom International; (2) the Omnibus Motion was initiated by lawyers
whose services had already been terminated, hence, were unauthorized to represent it; and (3) the agreed judicial
venue for dispute resolution relative to the implementation of the contract is the International Court of Arbitration in the
United Kingdom pursuant to Article 16.121 of said contract.
In the meantime, on November 3, 2002, the MMDA forwarded the contract to the Office of the President for
appropriate action,22 together with MMDA Resolution No. 02-1823 dated June 26, 2002, "Recommending to her
Excellency the President of the Republic of the Philippines to Disapprove the Contract Entered Into by the Executive
Committee of the Presidential Task Force on Waste Management with Jancom Environmental Corporation and for
Other Purposes."
By Order24 of November 18, 2002, the RTC noted the above-stated Entry of Special Appearance of Atty. Magdamit for
Jancom International and denied the Motion to Reject Pending Omnibus Motion for lack of merit. Jancom
International filed on December 9, 2002 a Motion for Reconsideration 25 which was denied for lack of merit by
Order26 of January 8, 2003.
Petitioners and respondents then filed their Memoranda 27 on May 23, 2003 and May 26, 2003, respectively.
By Order28 of June 11, 2003, the RTC granted respondents Omnibus Motion in part. The dispositive portion of the
Order reads, quoted verbatim:
WHEREFORE, in view of the foregoing, let an Alias Writ of Execution immediately issue and the Clerk of Court and
Ex-Oficio Sheriff or any o[f] her Deputies is directed to implement the same within sixty (60) days from receipt thereof.
Thus, any and all such bids or contracts entered into by respondent MMDA with third parties covering the waste
disposal and management within the Metro Manila after August 14, 2000 are hereby declared NULL and VOID.
Respondents are henceforth enjoined and prohibited, with a stern warning, from entering into any such contract with
any third party whether directly or indirectly, in violation of the contractual rights of petitioner JANCOM under the BOT
Contract Award, consistent with the Supreme Courts Decision of January 30, 2002.
Respondent MMDA is hereby directed to SUBMIT the Amended Agreement concluded by petitioners with the
previous MMDA officials, or in its discretion if it finds [it] more advantageous to the government, to require petitioners
to make adjustments in the Contract in accordance with existing environmental laws and other relevant concerns, and
thereafter forward the Amended Agreement for signature and approval by the President of the Philippines. The
concerned respondents are hereby further directed to comply fully and in good faith with its institutional obligations or
undertakings as provided in Article 18 of the BOT Contract.

84
Let a copy of this Order be furnished the Office of the Clerk of Court and the Commission on Audit for its information
and guidance.
SO ORDERED.29 (Emphasis in the original)
On June 23, 2003 the RTC issued an Alias Writ of Execution 30 reading:
WHEREAS, on May 29, 2000, a Decision was rendered by this Court in the above-entitled case, the pertinent
portions of which is [sic] hereunder quoted as follows:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of petitioners JANCOM
ENVIRONMENTAL CORP and JANCOM INTERNATIONAL DEVELOPMENT PROJECTS PTY., LIMITED OF
AUSTRALIAS [sic], and against respondents GREATER METROPOLITAN MANILA SOLID WASTE MANAGEMENT
COMM., and HON. ROBERTO N. AVENTAJADO, in his capacity as Chairman of the said Committee, METRO
MANILA DEVELOPMENT AUTHORITY and HON. JEJOMAR C. BINAY, in his capacity as Chairman of said Authority,
declaring the Resolution of respondent Greater Metropolitan Manila Solid Waste Management Committee
disregarding petitioners BOT Award Contract and calling for bids for and authorizing a new contract for the Metro
Manila waste management ILLEGAL an[d] VOID.
Moreover, respondents and their agents are hereby PROHIBITED and ENJOINED from implementing the aforesaid
Resolution and disregarding petitioners BOT Award Contract and from making another award in its place.
Let it be emphasized that this Court is not preventing or stopping the government from implementing infrastructure
projects as it is aware of the proscription under PD 1818. On the contrary, the Court is paving the way for the
necessary and modern solution to the perennial garbage problem that has been the major headache of the
government and in the process would serve to attract more investors in the country.
SO ORDERED.
WHEREAS, on August 7, 2000, petitioners through counsel filed a "Motion for Execution" which the Court GRANTED
in its Order dated August 14, 2000;
WHEREAS, as a consequence thereof, a Writ of Execution was issued on August 14, 2000 and was duly served upon
respondents as per Sheriffs Return dated August 27, 2000;
WHEREAS, ON July 29, 2002, petitioners through counsel filed an "Omnibus Motion," praying, among others, for the
issuance of an Alias Writ of Execution which the Court GRANTED in its Order dated June 11, 2003, the dispositive
portion of which reads as follows:
WHEREFORE, in view of the foregoing, let an Alias Writ of Execution immediately issue and the Clerk of Court and
Ex-Oficio Sheriff or any of her Deputies is directed to implement the same within sixty (60) days from receipt thereof.
Thus, any and all such bids or contracts entered into by respondent MMDA [with] third parties covering the waste
disposal and management within the Metro Manila after August 14, 2000 are hereby declared NULL and VOID.
Respondents are henceforth enjoined and prohibited, with a stern warning, from entering into any such contract with
any third party whether directly or indirectly, in violation of the contractual rights of petitioner Jancom under the BOT
Contract Award, consistent with the Supreme Courts Decision of January 30, 2002.
Respondent MMDA is hereby directed to SUBMIT the Amended Agreement concluded by petitioners with the
previous MMDA officials, or in its discretion if it finds [it] more advantageous to the government, to require petitioners
to make adjustments in the Contract in accordance with existing environmental laws and other relevant concerns, and
thereafter forward the Amended Agreement for signature and approval by the President of the Philippines. The
concerned respondents are hereby further directed to comply fully and in good faith with its institutional obligations or
undertakings as provided in Article 18 of the BOT Contract.
Let a copy of this Order be furnished the Office of the Clerk of Court and the Commission on Audit for its information
and guidance.
SO ORDERED.
x x x x (Emphasis in the original)
By letter31 of August 15, 2003, Chairman Fernando advised Sheriff Alejandro Q. Loquinario of the Office of the Clerk
of Court and Ex-Oficio Sheriff, Pasig City RTC that:
1. MMDA has not entered into a new contract for solid waste management in lieu of JANCOMs Contract.

85
2. JANCOMs Contract has been referred to the Office of the President for appropriate action.
3. Without the Presidents approval, JANCOMs Contract cannot be implemented. 32
Petitioners later challenged the RTC June 11, 2003 Order via petition for certiorari 33 with prayer for the issuance of a
temporary restraining order and/or writ of preliminary injunction before the CA. They subsequently filed an Amended
Petition34 on September 26, 2003.
To the Amended Petition JANCOM filed on October 8, 2003 its Comment 35 after which petitioners filed their Reply36 on
November 24, 2003.
By the challenged Decision of December 19, 2003, the CA denied the petition and affirmed the June 11, 2003 RTC
Order in this wise:
The Supreme Court ruled that the Jancom contract has the force of law and the parties must abide in good faith by
their respective contractual commitments. It is precisely this pronouncement that the alias writ of execution issued by
respondent judge seeks to enforce. x x x
xxxx
The fact that the Jancom contract has been declared unimplementable without the Presidents signature, would not
excuse petitioners failure to comply with their undertakings under Article 18 of the contract. x x x
xxxx
Petitioners complain that respondent judge focused only on requiring them to perform their supposed obligations
under Article 18 of the contract when private respondents are also required thereunder to post a Performance
Security acceptable to the Republic in the amount allowed in the BOT Law. Petitioners complaint is not justified. x x x
xxxx
It cannot x x x be said that respondent judge had been unfair or one-sided in directing only petitioners to fulfill their
own obligations under Article 18 of the Jancom contract. Compliance with private respondents obligations under the
contract had not yet become due.
xxxx
There is no debate that the trial courts Decision has attained finality. Once a judgment becomes final and executory,
the prevailing party can have it executed as a matter of right and the granting of execution becomes a mandatory or
ministerial duty of the court. After a judgment has become final and executory, vested rights are acquired by the
winning party. Just as the losing party has the right to file an appeal within the prescribed period, so also the winning
party has the correlative right to enjoy the finality of the resolution of the case.
It is true that the ministerial duty of the court to order the execution of a final and executory judgment admits of
exceptions as (a) where it becomes imperative in the higher interest of justice to direct the suspension of its
execution; or (b) whenever it is necessary to accomplish the aims of justice; or (c) when certain facts and
circumstances transpired after the judgment became final which could render the execution of the judgment unjust.
Petitioners have not shown that any of these exceptions exists to prevent the mandatory execution of the trial
courts Decision.37 (Italics in the original)
Petitioners Motion for Reconsideration38 having been denied by the CA by Resolution of May 11, 2004, the present
petition for review39 was filed on July 12, 2004 positing that:
THE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE LOWER COURT AND IN DISREGARDING
THE FOLLOWING PROPOSITIONS:
I
THE SUBJECT CONTRACT IS INEFFECTIVE AND UNIMPLEMENTABLE UNTIL AND UNLESS IT IS APPROVED
BY THE PRESIDENT.
II
THE SUBJECT CONTRACT ONLY COVERS THE DISPOSITION OF 3,000 TONS OF SOLID WASTE A DAY.

86
III
THE ALLEGED AMENDED AGREEMENT IS ONLY A DRAFT OR PROPOSAL SUBMITTED BY RESPONDENTS.
IV
RESPONDENTS MUST ALSO BE MADE TO COMPLY WITH THEIR CONTRACTUAL
COMMITMENTS.40 (Underscoring supplied)
JANCOM filed on September 20, 2004 its Comment41 on the petition to which petitioners filed their Reply42 on January
28, 2005.
On May 4, 2005, Jancom International filed its Comment, 43 reiterating its position that it did not authorize the filing
before the RTC by Atty. Molina of the July 29, 2002 Omnibus Motion that impleaded it as party-movant.
On July 7, 2005, petitioners filed their Reply44 to Jancom Internationals Comment.
Petitioners argue that since the contract remains unsigned by the President, it cannot yet be executed. Ergo, they
conclude, the proceedings which resulted in the issuance of an alias writ of execution "ran afoul of the [January 30,
2002] decision of [the Supreme] Court in G.R. No. 147465." 45
Petitioners go on to argue that since the contract covers only 3,000 tons of garbage per day while Metro Manila
generates at least 6,000 tons of solid waste a day, MMDA may properly bid out the other 3,000 tons of solid waste to
other interested groups or entities.
Petitioners moreover argue that the alleged Amended Agreement concluded supposedly between JANCOM and
former MMDA Chairman Benjamin Abalos is a mere scrap of paper, a mere draft or proposal submitted by JANCOM
to the MMDA, no agreement on which was reached by the parties; and at all events, express authority ought to have
first been accorded the MMDA to conclude such an amended agreement with JANCOM, the original contract having
been concluded between the Republic of the Philippines and JANCOM.
Finally, petitioners argue that respondents should also be required to perform their commitments pursuant to Article
1846 of the contract.
The petition is impressed with merit in light of the following considerations.
Section 1, Rule 39 of the Rules of Court provides:
SECTION 1. Execution upon judgments or final orders. Execution shall issue as a matter of right, on motion, upon a
judgment or order that disposes of the action or proceeding upon the expiration of the period to appeal therefrom if no
appeal has been duly perfected.
If the appeal has been duly perfected and finally resolved, the execution may forthwith be applied for in the court of
origin, on motion of the judgment obligee, submitting therewith certified true copies of the judgment or judgments or
final order or orders sought to be enforced and of the entry thereof, with notice to the adverse party.
The appellate court may, on motion in the same case, when the interest of justice so requires, direct the court of origin
to issue the writ of execution.
Once a judgment becomes final, it is basic that the prevailing party is entitled as a matter of right to a writ of execution
the issuance of which is the trial courts ministerial duty, compellable by mandamus. 47
There are instances, however, when an error may be committed in the course of execution proceedings prejudicial to
the rights of a party. These instances call for correction by a superior court, as where:
1) the writ of execution varies the judgment;
2) there has been a change in the situation of the parties making execution inequitable or unjust;
3) execution is sought to be enforced against property exempt from execution;
4) it appears that the controversy has never been submitted to the judgment of the court;
5) the terms of the judgment are not clear enough and there remains room for interpretation thereof; or

87
6) it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or
is issued against the wrong party, or that the judgment debt has been paid or otherwise satisfied, or the writ
was issued without authority.48 (Emphasis and Underscoring supplied)
That a writ of execution must conform to the judgment which is to be executed, substantially to every essential
particular thereof,49 it is settled. It may not thus vary the terms of the judgment it seeks to enforce, 50 nor go beyond its
terms. Where the execution is not in harmony with the judgment which gives it life and exceeds it, it has no validity.51
This Courts January 30, 2002 Decision in G.R. No. 147465 held:
We, therefore, hold that the Court of Appeals did not err when it declared the existence of a valid and perfected
contract between the Republic of the Philippines and JANCOM. There being a perfected contract, MMDA cannot
revoke or renounce the same without the consent of the other. From the moment of perfection, the parties are bound
not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to
their nature, may be in keeping with good faith, usage, and law (Article 1315, Civil Code). The contract has the force
of law between the parties and they are expected to abide in good faith by their respective contractual commitments,
not weasel out of them. Just as nobody can be forced to enter into a contract, in the same manner, once a contract is
entered into, no party can renounce it unilaterally or without the consent of the other. It is a general principle of law
that no one may be permitted to change his mind or disavow and go back upon his own acts, or to proceed contrary
thereto, to the prejudice of the other party. Nonetheless, it has to be repeated that although the contract is a
perfected one, it is still ineffective or unimplementable until and unless it is approved by the
President.52 (Emphasis and Underscoring supplied)
This Courts April 10, 2002 Resolution also in G.R. No. 147465 moreover held:
x x x The only question before the Court is whether or not there is a valid and perfected contract between the parties.
As to the necessity, expediency, and wisdom of the contract, these are outside the realm of judicial adjudication.
These considerations are primarily and exclusively a matter for the President to decide. While the Court recognizes
that the garbage problem is a matter of grave public concern, it can only declare that the contract in question is a valid
and perfected one between the parties, but the same is still ineffective or unimplementable until and unless it is
approved by the President, the contract itself providing that such approval by the President is necessary for
its effectivity.53 (Emphasis and Underscoring supplied)
Article 19 of the contract provides:
Article 19. Effectivity. This Contract shall become effective upon approval by the President of the Republic of [the]
Philippines pursuant to existing Laws subject to condition precedent in Article 18. This Contract shall remain in full
force and effect for twenty five (25) years subject to renewal for another twenty five (25) years from the date of
Effectivity. Such renewal will be subject to mutual agreement of the parties and approval by the [P]resident of the
Republic of [the] Philippines. (Emphasis and underscoring supplied)
In issuing the alias writ of execution, the trial court in effect ordered the enforcement of the contract despite this
Courts unequivocal pronouncement that albeit valid and perfected, the contract shall become effective only upon
approval by the President.
Indubitably, the alias writ of execution varied the tenor of this Courts judgment, went against essential portions and
exceeded the terms thereof.
x x x a lower court is without supervisory jurisdiction to interpret or to reverse the judgment of the higher court x x x. A
judge of a lower court cannot enforce different decrees than those rendered by the superior court. x x x
The inferior court is bound by the decree as the law of the case, and must carry it into execution according to the
mandate. They cannot vary it, or examine it for any other purpose than execution, or give any other or further relief, or
review it upon any matter decided on appeal for error apparent, or intermeddle with it, further than to settle so much
as has been remanded. x x x54
The execution directed by the trial court being out of harmony with the judgment, legal implications cannot save it
from being found to be fatally defective. 55
Notably, while the trial court ratiocinated that it issued on June 23, 2003 the alias writ "to set into motion the legal
mechanism for Presidential approval and signature," 56 it failed to take due consideration of the fact that during the
pendency of the Omnibus Motion, the contract had earlier been forwarded for appropriate action on November 3,
2002 by Chairman Fernando to the Office of the President, with recommendation for its disapproval, which fact the
trial court had been duly informed of through pleadings and open court manifestations. 57

88
Additionally, it bears noting that the June 11, 2003 Order of the trial court is likewise indisputably defective in
substance for having directed the submission of the draft Amended Agreement to the President.
The appellate court, in affirming the June 11, 2003 Order of the trial court, overlooked the fact that the Amended
Agreement was unsigned by the parties and it instead speculated and rationalized that the submission thereof to the
President would at all events solve the mounting garbage problem in Metro Manila:
We find that the submission of the Amended Agreement to the President will break the impasse now existing between
the parties which has effectively halted the governments efforts to address Metro Manilas mounting garbage
problem. x x x
As long as petitioners refuse to deal with private respondents, the Metro Manila garbage problem will only continue to
worsen. x x x
That the Amended Agreement could have well been negotiated, if not concluded between private respondents and
the former MMDA administration, is not far-fetched. Petitioners do not dispute that the President had referred the
Jancom contract to then MMDA Chairman Benjamin Abalos for recommendation. Petitioners also do not dispute that
private respondents negotiated with the MMDA for the amendment of the contract.
Besides, the Amended Agreement does not veer away from the original Jancom contract. x x x 58 lawphil.net
The Amended Agreement was, as petitioners correctly allege, merely a draft document containing the proposals of
JANCOM, subject to the approval of the MMDA. As earlier stated, it was not signed by the parties. 59
The original contract itself provides in Article 17.6 that it "may not be amended except by a written [c]ontractsigned by
the parties."60
It is elementary that, being consensual, a contract is perfected by mere consent. 61 The essence of consent is the
conformity of the parties to the terms of the contract, the acceptance by one of the offer made by the other; 62 it is the
concurrence of the minds of the parties on the object and the cause which shall constitute the contract. 63Where there
is merely an offer by one party without acceptance by the other, there is no consent and the contract does not come
into existence.64
As distinguished from the original contract in which this Court held in G.R. No. 147465:
x x x the signing and execution of the contract by the parties clearly show that, as between the parties, there was
concurrence of offer and acceptance with respect to the material details of the contract, thereby giving rise to the
perfection of the contract. The execution and signing of the contract is not disputed by the parties x x x, 65
the parties did not, with respect to the Amended Agreement, get past the negotiation stage. No meeting of minds was
established. While there was an initial offer made, there was no acceptance.
Even JANCOM President Alfonso G. Tuzon conceded, by letter 66 of June 17, 2002 to Chairman Fernando, that the
Amended Agreement was a mere proposal:
Apropos to all these, we are seeking an urgent EXECUTIVE SESSION on your best time and venue. We can thresh
up major points to establish a common perspective based on data and merit.
We are optimistic you shall then consider with confidence the proposed Amended Contract which incorporates the
adjustments we committed to as stated and earlier submitted to your Office during the incumbency of your
predecessor, for evaluation and appropriate action by NEDA in compliance with the BOT Law and Article 18.1.1 of our
contract.67
While respondents aver that an acceptance was made, they have not proffered any proof. While indeed the MMDA,
by a letter68 issued by then MMDA General Manager Jaime Paz, requested then Secretary of Justice Hernando B.
Perez for his legal opinion on the draft Amended Agreement, nowhere in the letter is there any statement indicating
that the MMDA, or the Republic of the Philippines for that matter, had approved respondents proposals embodied in
the said draft agreement.
The pertinent portions of the letter read:
Attention: HON. HERNANDO B. PEREZ
Secretary

89
Subject: Request for Opinion Regarding the Compromise Offer of Jancom Environmental Corporation for the
Municipal Solid Waste Management of Metro Manila
Dear Secretary Perez:
This is to respectfully request for an opinion from your Honorable Office regarding the Compromise Proposal offered
by JANCOM Environmental Corporation ("JANCOM") in relation to its Contract for the BOT Implementation of the
Waste Management Project for the San Mateo, Rizal Waste Disposal Site dated 19 December 1997 (hereinafter
referred to as the BOT Contract for brevity) with the Republic of the Philippines.
xxxx
x x x this representation is requesting your Honorable Office to render a legal opinion on the following:
Does the offer of JANCOM to temporarily set aside the waste-to-energy plant and implement only the other two major
components of the BOT Contract amount to a novation of the BOT Contract, and therefore necessitating a rebidding? If the same does not amount to a novation, by what authority may Jancom set aside temporarily a major
component of the BOT Contract?
x x x x69
Only an absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect a
contract.70 If at all, the MMDA letter only shows that the parties had not gone beyond the preparation stage, which is
the period from the start of the negotiations until the moment just before the agreement of the parties. 71Obviously,
other material considerations still remained before the Amended Agreement could be perfected. At any time prior to
the perfection of a contract, unaccepted offers and proposals remain as such and cannot be considered as binding
commitments.72
Respecting petitioners argument that respondents should be directed to comply with their commitments under Article
18 of the contract, this Court is not convinced.
Article 18.2.1 of the contract provides:
18.2.1 The BOT COMPANY hereby undertakes to provide the following within 2 months from execution of this
Contract as an effective document:
a) sufficient proof of the actual equity contributions from the proposed shareholders of the BOT COMPANY in
a total amount not less than PHP 500,000,000 in accordance with the BOT Law and the implementing rules
and regulations;1avvphil.net
b) sufficient proof of financial commitment from a lending institution sufficient to cover total project cost in
accordance with the BOT Law and the implementing rules and regulations;
c) to support its obligation under this Contract, the BOT COMPANY shall submit a security bond to the
CLIENT in accordance with the form and amount required under the BOT Law. (Underscoring supplied)
As this Court held in G.R. No. 147465:
As clearly stated in Article 18, JANCOM undertook to comply with the stated conditions within 2 months from
execution of the Contract as an effective document. Since the President of the Philippines has not yet affixed his
signature on the contract, the same has not yet become an effective document. Thus, the two-month period within
which JANCOM should comply with the conditions has not yet started to run. x x x73 (Underscoring supplied)
A final point. The argument raised against the authority of Atty. Molina to file respondents Omnibus Motion before the
RTC does not lie.
Representation continues until the court dispenses with the services of counsel in accordance with Section 26, Rule
138 of the Rules of Court.74 No substitution of counsel of record is allowed unless the following essential requisites
concur: (1) there must be a written request for substitution; (2) it must be filed with the written consent of the client; (3)
it must be with the written consent of the attorney to be substituted; and (4) in case the consent of the attorney to be
substituted cannot be obtained, there must be at least a proof of notice that the motion for substitution was served on
him in the manner prescribed by the Rules of Court. 75
In the case at bar, there is no showing that there was a valid substitution of counsel at the time Atty. Molina filed the
Omnibus Motion on July 29, 2002 before the RTC, nor that he had priorly filed a Withdrawal of Appearance. He thus
continued to enjoy the presumption of authority granted to him by respondents.

90
While clients undoubtedly have the right to terminate their relations with their counsel and effect a substitution or
change at any stage of the proceedings, the exercise of such right is subject to compliance with the prescribed
requirements. Otherwise, no substitution can be effective and the counsel who last appeared in the case before the
substitution became effective shall still be responsible for the conduct of the case. 76 The rule is intended to ensure the
orderly disposition of cases.77
In the absence then of compliance with the essential requirements for valid substitution of the counsel of record, Atty.
Molina enjoys the presumption of authority granted to him by respondents.
In light of the foregoing disquisition, a discussion of the other matters raised by petitioners has been rendered
unnecessary.
WHEREFORE, the petition is GRANTED. The Decision dated December 19, 2003 and Resolution dated May 11,
2004 of the Court of Appeals in CA-G.R. SP No. 78752 are REVERSED and SET ASIDE. The June 11, 2003 Order
of the Regional Trial Court of Pasig, Branch 68 in SCA No. 1955 is declared NULL and VOID.
SO ORDERED.
SECOND DIVISION

[G.R. No. 143370. February 6, 2002]

MARIO J. MENDEZONA and TERESITA M. MENDEZONA, LUIS J. MENDEZONA and MARICAR L. MENDEZONA
and TERESITA ADAD VDA. DE MENDEZONA, petitioners, vs. JULIO H. OZAMIZ, ROBERTO J.
MONTALVAN, JOSE MA. OZAMIZ, CARMEN H. OZAMIZ, PAZ O. MONTALVAN, MA. TERESA O.F.
ZARRAGA, CARLOS O. FORTICH, JOSE LUIS O. ROS, PAULITA O. RODRIGUEZ, and LOURDES O.
LON, respondents.
DECISION
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision[1] and the Resolution[2] of the Court of Appeals dated
July 27, 1998 and May 19, 2000, respectively, in CA-G.R. CV No. 39752 which reversed and set aside the
Decision[3] dated September 23, 1992 rendered in favor of the petitioners by the Regional Trial Court (RTC)
of Cebu City, Branch 6 in Civil Case No. CEB-10766.
Civil Case No. CEB-10766 is a suit for quieting of title. It was instituted on September 25, 1991 by petitioner
spouses Mario J. Mendezona and Teresita M. Mendezona as initial plaintiffs,[4]and in the amended complaint filed
on October
7,
1991,
herein
co-petitioner
spouses
Luis
J. Mendezona and Maricar L. Mendezona and Teresita Adad Vda. de Mendezona joined as co-plaintiffs.[5]
In their complaint, the petitioners, as plaintiffs therein, alleged that petitioner spouses Mario
J. Mendezona and Teresita M. Mendezona, petitioner spouses Luis J. Mendezona and Maricar L.Mendezona, and
petitioner Teresita Adad Vda. de Mendezona own a parcel of land each in the Banilad Estate, Lahug, Cebu City with
almost similar areas of 3,462 square meters, 3,466 square meters and 3,468 square meters, covered and described
in Transfer Certificate of Title (TCT) Nos. 116834, 116835, and 116836 respectively, of the Registry of Deeds
of Cebu City.[6]
The petitioners ultimately traced their titles of ownership over their respective properties from a notarized Deed of
Absolute Sale[7] dated April 28, 1989 executed in their favor by CarmenOzamiz for and in consideration of the sum of
One Million Forty Thousand Pesos (P1,040,000.00).
The petitioners initiated the suit to remove a cloud on their said respective titles caused by the inscription thereon
of a notice of lis pendens, which came about as a result of an incident in Special Proceeding No. 1250 of the RTC
of Oroquieta City. Special Proceeding No. 1250 is a proceeding for guardianship over the person and properties of
Carmen Ozamiz initiated by the respondents Julio H. Ozamiz, Jose Ma. Ozamiz, Carmen H. Ozamiz,[8] Paz
O. Montalvan, Ma. Teresa O.F. Zarraga, Carlos O. Fortich, Jose Luis O. Ros, Paulita O. Rodriguez and Lourdes O.
Lon.[9]
It appears that on January 15, 1991, the respondents instituted the petition for guardianship with the Regional
Trial Court of Oroquieta City, alleging therein that Carmen Ozamiz, then 86 years old, after an illness in July 1987,
had become disoriented and could not recognize most of her friends; that she could no longer take care of herself nor
manage her properties by reason of her failing health, weak mind and absent-mindedness. Mario Mendezona and
Luis Mendezona, herein petitioners who are nephews of Carmen Ozamiz, and Pilar Mendezona, a sister of
CarmenOzamiz, filed an opposition to the guardianship petition.

91
In the course of the guardianship proceeding, the petitioners and the oppositors thereto agreed that
Carmen Ozamiz needed a guardian over her person and her properties, and thus respondent Paz O. Montalvan was
designated as guardian over the person of Carmen Ozamiz while petitioner Mario J. Mendezona, respondents
Roberto J. Montalvan and Julio H. Ozamiz were designated as joint guardians over the properties of the said ward.
As guardians, respondents Roberto J. Montalvan and Julio H. Ozamiz filed on August 6, 1991 with the
guardianship court their inventories and Accounts, [10] listing therein Carmen Ozamizsproperties, cash, shares of
stock, vehicles and fixed assets, including a 10,396 square meter property known as the Lahug property.
Said Lahug property is the same property covered by the Deed of Absolute Sale dated April 28, 1989 executed by
Carmen Ozamiz in favor of the petitioners. Respondents Roberto J. Montalvan and Julio H. Ozamiz caused the
inscription on the titles of petitioners a notice of lis pendens,[11] regarding Special Proceeding No. 1250, thus giving
rise to the suit for quieting of title, Civil Case No. CEB-10766, filed by herein petitioners.
In their Answer[12] in Civil Case No. CEB-10766 the respondents opposed the petitioners claim of ownership of
the Lahug property and alleged that the titles issued in the petitioners names are defective and illegal, and the
ownership of the said property was acquired in bad faith and without value inasmuch as the consideration for the sale
is grossly inadequate and unconscionable. Respondents further alleged that at the time of the sale on April 28,
1989 Carmen Ozamiz was already ailing and not in full possession of her mental faculties; and that her properties
having been placed in administration, she was in effect incapacitated to contract with petitioners.
The issues for resolution were delimited in the pre-trial to: (a) the propriety of recourse to quieting of title; (b) the
validity or nullity of the Deed of Absolute Sale dated April 28, 1989 executed by Carmen Ozamiz in favor of herein
petitioners; (c) whether the titles over the subject parcel of land in plaintiffs names be maintained or should they be
cancelled and the subject parcels of landreconveyed; and (d) damages and attorneys fees.[13]
Trial on the merits ensued with the parties presenting evidence to prove their respective allegations. Petitioners
Mario Mendezona, Teresita Adad Vda. de Mendezona and Luis Mendezona, as plaintiffs therein, testified on the
circumstances surrounding the sale. Carmencita Cedeno and Martin Yungco, instrumental witnesses to the Deed of
Absolute Sale dated April 28, 1989, and, Atty. Asuncion Bernades, the notary public who notarized the said document,
testified that on the day of execution of the said contract that Carmen Ozamiz was of sound mind and that she
voluntarily and knowingly executed the said deed of sale.
For
the
defendants,
the
testimonies
of
respondent
Paz
O. Montalvan,
a
sister
of
Carmen Ozamiz; Concepcion Agac-ac, an assistant of Carmen Ozamiz; respondent Julio Ozamiz; CarolinaLagura,
a househelper of Carmen Ozamiz; Joselito Gunio, an appraiser of land; Nelfa Perdido, a part-time bookkeeper of
Carmen Ozamiz, and the deposition of Dr. Faith Go, physician of Carmen Ozamiz, were offered in evidence.
The petitioners presented as rebuttal witnesses petitioners Mario Mendezona and Luis Mendezona, to rebut the
testimony of respondent Julio H. Ozamiz; and, Dr. William Buot, a doctor of neurology to rebut aspects of the
deposition of Dr. Faith Go on the mental capacity of Carmen Ozamiz at the time of the sale.
During the trial, the trial court found that the following facts have been duly established: [14]
(1) On April 28, 1989, Carmen Ozamiz sold to her nephews, Mario, Antonio and Luis, all surnamed Mendezona,
three (3) parcels of residential land in Cebu City, per a Deed of Absolute Sale (Exh. D) for a consideration of
P1,040,000.00, in which deed the usufructuary rights were reserved during her lifetime.
(2) The three parcels of land were subsequently transferred to the names of the three vendees per TCTs Nos.
108729, 108730 and 108731 (Exhs. J, K & L, respectively). A partition agreement was entered into by the three
vendees (Exh. 3) and the parcels of land are now titled in the names of the plaintiffs.
Mario Mendezona TCT No. 116834 (Exh. A);
Luis Mendezona TCT No. 116835 (Exh. B);
Antonio Mendezona TCT No. 116836 (Exh. C);
(3) The reservation of the usufructuary rights to the vendor Carmen Ozamiz during her lifetime was confirmed by
the plaintiffs-spouses Mario Mendezona and Teresita Moraza and plaintiffs spouses
Luis Mendezona andMaricar Longa in a sworn statement (Exh. I) executed on October 15, 1990, which was duly
annotated on the titles of the property;
(4) The capital gains tax was paid (Exh. H) on May 5, 1989 and a certificate (Exh. H-1) was issued by the Bureau
of Internal Revenue authorizing the Register of Deeds to transfer the property to the vendees;
(5) A petition for guardianship over the person and properties of Carmen Ozamiz (Exh. E) was filed by all the
defendants, (except the defendant Roberto Montalvan) on January 15, 1991 with the Regional Trial Court
of Oroquieta City, denominated as Spec. Proc. No. 1250 and subsequently, an Inventories and Accounts (Exh. F)
was filed by court-appointed guardians Roberto Montalvan and Julio Ozamiz, in which the property was listed (Exh. F1) and a Notice of Lis Pendens was filed with the Register of Deeds of Cebu City on August 13, 1991 by said joint

92
guardians. Plaintiff Mario Mendezona, as another joint guardian over Carmen Ozamiz, filed his opposition (Exh. R) to
the Inventories and Accounts, with the Oroquieta Court as to the inclusion of the property (Exh.R-1).
(6) Prior to his death, the deceased husband of plaintiff Teresita Adad Mendezona was granted a General Power of
Attorney (Exh. 1) by Carmen Ozamiz on March 23, 1988 and after his demise, Carmen Ozamizgranted
Mario Mendezona a General Power of Attorney (Exh. 2.) on August 11, 1990. Both powers of attorney relate to the
administration of the property, subject of this action, in Cebu City.
On September 23, 1992 the trial court rendered its decision in favor of the petitioners, the dispositive portion of
which reads, to wit:
Wherefore, premises considered, the Court is of the opinion and so declares that:
1.
The property described in the complaint was sold, with reservation of usufructuary rights by Carmen Ozamiz to
the plaintiffs under a valid contract, voluntarily and deliberately entered into while she was of sound mind, for
sufficient and good consideration, and without fraud, force, undue influence or intimidation having been exercised
upon her, and consequently, the Court orders the defendants herein to acknowledge and recognize the plaintiffs title
to the aforecited property and to refrain from further clouding the same;
2.
That the one-third (1/3) share erroneously titled to Antonio Mendezona should be titled in the name
of Teresita Adad vda. de Mendezona as her paraphernal property and the Register of Deeds of Cebu City is hereby
ordered to do so;
3.
The Notice of Lis Pendens affecting the property should be eliminated from the record and the Register of
Deeds of Cebu City is ordered to expunge the same.
No pronouncement as to costs.
SO ORDERED.
On appeal to the Court of Appeals, the appellate court reversed the factual findings of the trial court and ruled
that the Deed of Absolute Sale dated April 28, 1989 was a simulated contract since the petitioners failed to prove that
the consideration was actually paid, and, furthermore, that at the time of the execution of the contract the mental
faculties of Carmen Ozamiz were already seriously impaired. Thus, the appellate court declared that the Deed of
Absolute Sale of April 28, 1989 is null and void. It ordered the cancellation of the certificates of title issued in the
petitioners names and directed the issuance of new certificates of title in favor of Carmen Ozamiz or her estate.
Petitioners filed a motion for reconsideration of the decision of the appellate court. Subsequent thereto, the
petitioners filed a motion for a new trial and/or for reception of evidence. They contended, among other things, that
the appellate court totally ignored the testimony of Judge Teodorico Durias regarding the mental condition of
Carmen Ozamiz a month before the execution of the Deed of Absolute Sale in question. The said testimony was
taken in the Special Proceeding No. 1250 in the Regional Trial Court of Oroquieta City. However, Judge Durias was
not presented as a witness in Civil Case No. CEB-10766 in the Regional Trial Court of Cebu City. Petitioners alleged
that Judge Duriass testimony is a newly-discovered evidence which could not have been discovered prior to the trial
in the court below by the exercise of due diligence.
The appellate court denied both motions in its Resolution dated May 19, 2000. Hence, the instant petition
anchored on the following grounds:[15]
I.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE APRIL 28, 1989 DEED OF
ABSOLUTE SALE WAS A SIMULATED CONTRACT.
A.
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTIONS OF ACTUAL
AND SUFFICIENT CONSIDERATION FOR, AND OF THE REGULARITY AND TRUTHFULNESS OF, THE
NOTARIZED DEED OF ABSOLUTE SALE.
B.
THE COURT OF APPEALS GRAVELY ERRED IN IMPOSING ON THE PETITIONERS THE BURDEN OF PROVING
PAYMENT, AND IN REFUSING TO RECOGNIZE AND RULE THAT IT WAS THE RESPONDENTS - AS THE
PARTIES ASSAILING THE DEED OF ABSOLUTE SALE - WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF
PROVING THAT THERE WAS NO CONSIDERATION FOR THE TRANSACTION.

93
C.
THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO RECEIVE IN EVIDENCE THE THREE (3)
CHECKS, WHICH PROVED BEYOND ANY DOUBT THAT THE PURCHASE PRICE FOR THE LAHUG PROPERTY
HAD BEEN PAID TO CARMEN OZAMIZ, AFTER ASKING FOR THEM AND HAVING THEM PRESENTED TO IT IN
OPEN COURT, THUS COOPERATING WITH RESPONDENTS EFFORTS TO SUPPRESS THE CHECKS (WHICH
THE COURT ITSELF AND RESPONDENTS CHALLENGED PETITIONERS TO PRODUCE).
II.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT CARMEN OZAMIZS MENTAL FACULTIES WERE
SERIOUSLY IMPAIRED WHEN SHE EXECUTED THE DEED OF ABSOLUTESALE ON APRIL 28, 1989.
A.
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE STATUTORY PRESUMPTION THAT CARMEN
OZAMIZ WAS OF SOUND MIND AND HAD THE REQUISITE CAPACITY TO CONTRACT WHEN SHE EXECUTED
THE DEED OF ABSOLUTE SALE, AND IN REFUSING TO RULE THAT IT WAS THE RESPONDENTS - AS THE
PARTIES ALLEGING MENTAL INCAPACITY- WHO HAD FAILED TO DISCHARGE THEIR BURDEN OF
REBUTTING THAT PRESUMPTION.
B.
THE COURT OF APPEALS GRAVELY ERRED IN REFUSING TO ACCEPT AND GIVE DUE AND PREPONDERANT
WEIGHT TO UNREFUTED EVIDENCE, INCLUDING THE UNREFUTED TESTIMONIES OF THE INSTRUMENTAL
WITNESSES AND OF THE NOTARY PUBLIC, THAT CARMEN OZAMIZ EXECUTED THE DEED OF
ABSOLUTE SALE FREELY, VOLUNTARILY, KNOWINGLY, AND INTELLIGENTLY.
C.
THE COURT OF APPEALS GRAVELY ERRED IN GIVING WEIGHT TO THE HEARSAY TESTIMONY OF DR. FAITH
GO ON THE MENTAL CONDITION OF CARMEN OZAMIZ ON THE DATE SHE EXECUTED THE DEED OF
ABSOLUTE SALE.
D.
THE COURT OF APPEALS GRAVELY ERRED IN IGNORING, AND IN REFUSING TO RECEIVE IN EVIDENCE,
JUDGE TEODORICO DURIASS TESTIMONY (THAT CARMEN OZAMIZ WAS OF SOUND MIND WHEN SHE
EXECUTED ANOTHER CONTRACT BARELY A MONTH BEFORE SHE EXECUTED THE DEED OF
ABSOLUTE SALE) ON THE GROUND THAT THAT TESTIMONY WAS FORGOTTEN EVIDENCE.
We shall first rule on the issue of whether to consider the testimony of Judge Durias as newly discovered
evidence. A motion for new trial upon the ground of newly discovered evidence is properly granted only where there is
concurrence of the following requisites, namely: (a) the evidence had been discovered after trial; (b) the evidence
could not have been discovered and produced during trial even with the exercise of reasonable diligence; and (c) the
evidence is material and not merely corroborative, cumulative or impeaching and is of such weight that if admitted,
would probably alter the result. All three (3) requisites must characterize the evidence sought to be introduced at the
new trial.
We find that the requirement of reasonable diligence has not been met by the petitioners. As early as the pre-trial
of the case at bar, the name of Judge Durias has already cropped up as a possible witness for the defendants,
herein respondents. That the respondents chose not to present him is not an indicia per se of suppression of
evidence, since a party in a civil case is free to choose who to present as his witness. Neither can Judge Durias
testimony in another case be considered as newly discovered evidence since the facts to be testified to by
Judge Durias which were existing before and during the trial, could have been presented by the petitioners at the trial
below.[16] The testimony of Judge Durias has been in existence waiting only to be elicited from him by questioning. [17]
It has been held that a lack of diligence is exhibited where the newly discovered evidence was necessary or
proper under the pleadings, and its existence must have occurred to the party in the course of the preparation of the
case, but no effort was made to secure it; there is a failure to make inquiry of persons who were likely to know the
facts in question, especially where information was not sought from co-parties; there is a failure to seek evidence
available through public records; there is a failure to discover evidence that is within the control of the complaining
party; there is a failure to follow leads contained in other evidence; and, there is a failure to utilize available discovery
procedures.[18] Thus, the testimony of Judge Durias cannot be considered as newly discovered evidence to warrant a
new trial.
In this petition at bench, herein petitioners essentially take exception to two (2) main factual findings of the
appellate court, namely, (a) that the notarized Deed of Absolute Sale dated April 28, 1989 was a simulated contract,

94
and (b) that Carmen Ozamizs mental faculties were seriously impaired when she executed the said contract on April
28, 1989. The petitioners allege that both conclusions are contrary or opposed to well-recognized statutory
presumptions of regularity enjoyed by a notarized document and that a contracting party to a notarized contract is of
sound and disposing mind when she executes the contract.
The respondents posit a different view. They contend that clear and convincing evidence refuted the
presumptions on regularity of execution of the Deed of Absolute Sale and existence of consideration thereof. Relying
upon the testimonies of Paz O. Montalvan, Concepcion Agac-ac, Carolina Lagura and Dr. Faith Go, they aver that
they were able to show that Carmen Ozamizwas already physically and mentally incapacitated since the latter part of
1987 and could not have executed the said Deed of Absolute Sale on April 28, 1989 covering the
disputed Lahugproperty. They also alleged that no error is ascribable to the appellate court for not considering the
allegedly rehearsed testimonies of the instrumental witnesses and the notary public.
Factual findings of the appellate court are generally conclusive on this Court which is not a trier of facts. It is not
the function of the Supreme Court to analyze or weigh evidence all over again. However, this rule is not without
exception. If there is a showing that the appellate courts findings of facts complained of are totally devoid of support
in the record or that they are so glaringly erroneous as to constitute grave abuse of discretion, this Court must discard
such erroneous findings of facts.[19] We find that the exception applies in the case at bench.
Simulation is defined as the declaration of a fictitious will, deliberately made by agreement of the parties, in
order to produce, for the purposes of deception, the appearances of a juridical act which does not exist or is different
from what that which was really executed. [20] The requisites of simulation are: (a) an outward declaration of will
different from the will of the parties; (b) the false appearance must have been intended by mutual agreement; and (c)
the purpose is to deceive third persons.[21] None of these were clearly shown to exist in the case at bar.
Contrary to the erroneous conclusions of the appellate court, a simulated contract cannot be inferred from the
mere non-production of the checks. It was not the burden of the petitioners to prove so. It is significant to note that
the Deed of Absolute Sale dated April 28, 1989 is a notarized document duly acknowledged before a notary
public. As such, it has in its favor the presumption of regularity, and it carries the evidentiary weight conferred upon it
with respect to its due execution. It is admissible in evidence without further proof of its authenticity and is entitled to
full faith and credit upon its face.[22]
Payment is not merely presumed from the fact that the notarized Deed of Absolute Sale dated April 28, 1989 has
gone through the regular procedure as evidenced by the transfer certificates of title issued in petitioners names by
the Register of Deeds. In other words, whosoever alleges the fraud or invalidity of a notarized document has the
burden of proving the same by evidence that is clear, convincing, and more than merely preponderant. [23] Therefore,
with this well-recognized statutory presumption, the burden fell upon the respondents to prove their allegations
attacking the validity and due execution of the said Deed of Absolute Sale. Respondents failed to discharge that
burden; hence, the presumption in favor of the said deed stands. But more importantly, that notarized deed shows on
its face that the consideration of One Million Forty Thousand Pesos (P1,040,000.00) was acknowledged to have been
received by Carmen Ozamiz.
Simulation cannot be inferred from the alleged absence of payment based on the testimonies
of Concepcion Agac-ac, assistant of Carmen Ozamiz, and Nelfa Perdido, part-time bookkeeper of Carmen Ozamiz.
The testimonies of these two (2) witnesses are unreliable and inconsistent.
While Concepcion Agac-ac testified that she was aware of all the transactions of Carmen Ozamiz, she also
admitted that not all income of Carmen Ozamiz passed through her since AntonioMendezona, as appointed
administrator, directly reported to Carmen Ozamiz.[24] With respect to Nelfa Perdido, she testified that most of the
transactions that she recorded refer only to rental income and expenses, and the amounts thereof were reported to
her by Concepcion Agac-ac only, not by Carmen Ozamiz. She does not record deposits or withdrawals in the bank
accounts of Carmen Ozamiz.[25] Their testimonies hardly deserve any credit and, hence, the appellate court misplaced
reliance thereon.
Considering that Carmen Ozamiz acknowledged, on the face of the notarized deed, that she received the
consideration at One Million Forty Thousand Pesos (P1,040,000.00), the appellate court should not have placed too
much emphasis on the checks, the presentation of which is not really necessary. Besides, the burden to prove alleged
non-payment of the consideration of the sale was on the respondents, not on the petitioners. Also, between its
conclusion based on inconsistent oral testimonies and a duly notarized document that enjoys presumption of
regularity, the appellate court should have given more weight to the latter. Spoken words could be notoriously
unreliable as against a written document that speaks a uniform language. [26]
Furthermore, the appellate court erred in ruling that at the time of the execution of the Deed of Absolute Sale
on April 28, 1989 the mental faculties of Carmen Ozamiz were already seriously impaired. [27] It placed too much
reliance upon the testimonies of the respondents witnesses. However, after a thorough scrutiny of the transcripts of
the testimonies of the witnesses, we find that the respondents core witnesses all made sweeping statements which
failed to show the true state of mind of Carmen Ozamiz at the time of the execution of the disputed document. The
testimonies of the respondents witnesses on the mental capacity of Carmen Ozamiz are far from being clear and
convincing, to say the least.
Carolina Lagura, a househelper of Carmen Ozamiz, testified that when Carmen Ozamiz was confronted by Paz
O. Montalvan in January 1989 with the sale of the Lahug property, CarmenOzamiz denied the same. She testified that

95
Carmen Ozamiz understood the question then. [28] However, this declaration is inconsistent with her (Carolinas)
statement that since 1988 CarmenOzamiz could not fully understand the things around her, that she was physically fit
but mentally could not carry a conversation or recognize persons who visited her. [29] Furthermore, the disputed sale
occurred on April 28, 1989 or three (3) months after this alleged confrontation in January 1989. This inconsistency
was not explained by the respondents.
The revelation of Dr. Faith Go did not also shed light on the mental capacity of Carmen Ozamiz on the relevant
day - April 28, 1989 when the Deed of Absolute Sale was executed and notarized. At best, she merely revealed that
Carmen Ozamiz was suffering from certain infirmities in her body and at times, she was forgetful, but there was no
categorical statement that CarmenOzamiz succumbed to what the respondents suggest as her alleged second
childhood as early as 1987. The petitioners rebuttal witness, Dr. William Buot, a doctor of neurology, testified that no
conclusion of mental incapacity at the time the said deed was executed can be inferred from Dr. Faith Gos clinical
notes nor can such fact be deduced from the mere prescription of a medication for episodic memory loss.
It has been held that a person is not incapacitated to contract merely because of advanced years or by reason of
physical infirmities. Only when such age or infirmities impair her mental faculties to such extent as to prevent her from
properly, intelligently, and fairly protecting her property rights, is she considered incapacitated. [30] The respondents
utterly failed to show adequate proof that at the time of the sale on April 28, 1989 Carmen Ozamiz had allegedly lost
control of her mental faculties.
We note that the respondents sought to impugn only one document, namely, the Deed of Absolute Sale
dated April 28, 1989, executed by Carmen Ozamiz. However, there are nine (9) other important documents that were,
signed by Carmen Ozamiz either before or after April 28, 1989 which were not assailed by the respondents. [31] Such is
contrary to their assertion of complete incapacity of Carmen Ozamiz to handle her affairs since 1987. We agree with
the trial courts assessment that it is unfair for the [respondents] to claim soundness of mind of Carmen Ozamizwhen
it benefits them and otherwise when it disadvantages them. [32] A person is presumed to be of sound mind at any
particular time and the condition is presumed to continue to exist, in the absence of proof to the contrary.
[33]
Competency and freedom from undue influence, shown to have existed in the other acts done or contracts
executed, are presumed to continue until the contrary is shown. [34]
All the foregoing considered, we find the instant petition to be meritorious and the same should be granted.
WHEREFORE, the instant petition is hereby GRANTED and the assailed Decision and Resolution of the Court of
Appeals are hereby REVERSED and SET ASIDE. The Decision datedSeptember 23, 1992 of
the Regional Trial Court of Cebu City, Branch 6, in Civil Case No. CEB-10766 is REINSTATED. No pronouncement as
to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 133250

July 9, 2002

FRANCISCO I. CHAVEZ, petitioner,

vs.
PUBLIC ESTATES AUTHORITY and AMARI COASTAL BAY DEVELOPMENT CORPORATION, respondents.
CARPIO, J.:
This is an original Petition for Mandamus with prayer for a writ of preliminary injunction and a temporary restraining
order. The petition seeks to compel the Public Estates Authority ("PEA" for brevity) to disclose all facts on PEA's then
on-going renegotiations with Amari Coastal Bay and Development Corporation ("AMARI" for brevity) to reclaim
portions of Manila Bay. The petition further seeks to enjoin PEA from signing a new agreement with AMARI involving
such reclamation.
The Facts
On November 20, 1973, the government, through the Commissioner of Public Highways, signed a contract with the
Construction and Development Corporation of the Philippines ("CDCP" for brevity) to reclaim certain foreshore and
offshore areas of Manila Bay. The contract also included the construction of Phases I and II of the Manila-Cavite
Coastal Road. CDCP obligated itself to carry out all the works in consideration of fifty percent of the total reclaimed
land.

96
On February 4, 1977, then President Ferdinand E. Marcos issued Presidential Decree No. 1084 creating PEA. PD
No. 1084 tasked PEA "to reclaim land, including foreshore and submerged areas," and "to develop, improve, acquire,
x x x lease and sell any and all kinds of lands."1 On the same date, then President Marcos issued Presidential Decree
No. 1085 transferring to PEA the "lands reclaimed in the foreshore and offshore of the Manila Bay" 2 under the ManilaCavite Coastal Road and Reclamation Project (MCCRRP).
On December 29, 1981, then President Marcos issued a memorandum directing PEA to amend its contract with
CDCP, so that "[A]ll future works in MCCRRP x x x shall be funded and owned by PEA." Accordingly, PEA and CDCP
executed a Memorandum of Agreement dated December 29, 1981, which stated:
"(i) CDCP shall undertake all reclamation, construction, and such other works in the MCCRRP as may be
agreed upon by the parties, to be paid according to progress of works on a unit price/lump sum basis for items
of work to be agreed upon, subject to price escalation, retention and other terms and conditions provided for
in Presidential Decree No. 1594. All the financing required for such works shall be provided by PEA.
xxx
(iii) x x x CDCP shall give up all its development rights and hereby agrees to cede and transfer in favor of
PEA, all of the rights, title, interest and participation of CDCP in and to all the areas of land reclaimed by
CDCP in the MCCRRP as of December 30, 1981 which have not yet been sold, transferred or otherwise
disposed of by CDCP as of said date, which areas consist of approximately Ninety-Nine Thousand Four
Hundred Seventy Three (99,473) square meters in the Financial Center Area covered by land pledge No. 5
and approximately Three Million Three Hundred Eighty Two Thousand Eight Hundred Eighty Eight (3,382,888)
square meters of reclaimed areas at varying elevations above Mean Low Water Level located outside the
Financial Center Area and the First Neighborhood Unit." 3
On January 19, 1988, then President Corazon C. Aquino issued Special Patent No. 3517, granting and transferring to
PEA "the parcels of land so reclaimed under the Manila-Cavite Coastal Road and Reclamation Project (MCCRRP)
containing a total area of one million nine hundred fifteen thousand eight hundred ninety four (1,915,894) square
meters." Subsequently, on April 9, 1988, the Register of Deeds of the Municipality of Paraaque issued Transfer
Certificates of Title Nos. 7309, 7311, and 7312, in the name of PEA, covering the three reclaimed islands known as
the "Freedom Islands" located at the southern portion of the Manila-Cavite Coastal Road, Paraaque City. The
Freedom Islands have a total land area of One Million Five Hundred Seventy Eight Thousand Four Hundred and
Forty One (1,578,441) square meters or 157.841 hectares.
On April 25, 1995, PEA entered into a Joint Venture Agreement ("JVA" for brevity) with AMARI, a private corporation,
to develop the Freedom Islands. The JVA also required the reclamation of an additional 250 hectares of submerged
areas surrounding these islands to complete the configuration in the Master Development Plan of the Southern
Reclamation Project-MCCRRP. PEA and AMARI entered into the JVA through negotiation without public bidding. 4 On
April 28, 1995, the Board of Directors of PEA, in its Resolution No. 1245, confirmed the JVA. 5On June 8, 1995, then
President Fidel V. Ramos, through then Executive Secretary Ruben Torres, approved the JVA. 6
On November 29, 1996, then Senate President Ernesto Maceda delivered a privilege speech in the Senate and
denounced the JVA as the "grandmother of all scams." As a result, the Senate Committee on Government
Corporations and Public Enterprises, and the Committee on Accountability of Public Officers and Investigations,
conducted a joint investigation. The Senate Committees reported the results of their investigation in Senate
Committee Report No. 560 dated September 16, 1997. 7 Among the conclusions of their report are: (1) the reclaimed
lands PEA seeks to transfer to AMARI under the JVA are lands of the public domain which the government has not
classified as alienable lands and therefore PEA cannot alienate these lands; (2) the certificates of title covering the
Freedom Islands are thus void, and (3) the JVA itself is illegal.
On December 5, 1997, then President Fidel V. Ramos issued Presidential Administrative Order No. 365 creating a
Legal Task Force to conduct a study on the legality of the JVA in view of Senate Committee Report No. 560. The
members of the Legal Task Force were the Secretary of Justice, 8 the Chief Presidential Legal Counsel,9 and the
Government Corporate Counsel.10 The Legal Task Force upheld the legality of the JVA, contrary to the conclusions
reached by the Senate Committees.11
On April 4 and 5, 1998, the Philippine Daily Inquirer and Today published reports that there were on-going
renegotiations between PEA and AMARI under an order issued by then President Fidel V. Ramos. According to these
reports, PEA Director Nestor Kalaw, PEA Chairman Arsenio Yulo and retired Navy Officer Sergio Cruz composed the
negotiating panel of PEA.
On April 13, 1998, Antonio M. Zulueta filed before the Court a Petition for Prohibition with Application for the Issuance
of a Temporary Restraining Order and Preliminary Injunction docketed as G.R. No. 132994 seeking to nullify the JVA.
The Court dismissed the petition "for unwarranted disregard of judicial hierarchy, without prejudice to the refiling of the
case before the proper court."12

97
On April 27, 1998, petitioner Frank I. Chavez ("Petitioner" for brevity) as a taxpayer, filed the instant Petition for
Mandamus with Prayer for the Issuance of a Writ of Preliminary Injunction and Temporary Restraining Order.
Petitioner contends the government stands to lose billions of pesos in the sale by PEA of the reclaimed lands to
AMARI. Petitioner prays that PEA publicly disclose the terms of any renegotiation of the JVA, invoking Section 28,
Article II, and Section 7, Article III, of the 1987 Constitution on the right of the people to information on matters of
public concern. Petitioner assails the sale to AMARI of lands of the public domain as a blatant violation of Section 3,
Article XII of the 1987 Constitution prohibiting the sale of alienable lands of the public domain to private corporations.
Finally, petitioner asserts that he seeks to enjoin the loss of billions of pesos in properties of the State that are of
public dominion.
After several motions for extension of time, 13 PEA and AMARI filed their Comments on October 19, 1998 and June 25,
1998, respectively. Meanwhile, on December 28, 1998, petitioner filed an Omnibus Motion: (a) to require PEA to
submit the terms of the renegotiated PEA-AMARI contract; (b) for issuance of a temporary restraining order; and (c)
to set the case for hearing on oral argument. Petitioner filed a Reiterative Motion for Issuance of a TRO dated May
26, 1999, which the Court denied in a Resolution dated June 22, 1999.
In a Resolution dated March 23, 1999, the Court gave due course to the petition and required the parties to file their
respective memoranda.
On March 30, 1999, PEA and AMARI signed the Amended Joint Venture Agreement ("Amended JVA," for brevity). On
May 28, 1999, the Office of the President under the administration of then President Joseph E. Estrada approved the
Amended JVA.
Due to the approval of the Amended JVA by the Office of the President, petitioner now prays that on "constitutional
and statutory grounds the renegotiated contract be declared null and void." 14
The Issues
The issues raised by petitioner, PEA15 and AMARI16 are as follows:
I. WHETHER THE PRINCIPAL RELIEFS PRAYED FOR IN THE PETITION ARE MOOT AND ACADEMIC
BECAUSE OF SUBSEQUENT EVENTS;
II. WHETHER THE PETITION MERITS DISMISSAL FOR FAILING TO OBSERVE THE PRINCIPLE
GOVERNING THE HIERARCHY OF COURTS;
III. WHETHER THE PETITION MERITS DISMISSAL FOR NON-EXHAUSTION OF ADMINISTRATIVE
REMEDIES;
IV. WHETHER PETITIONER HAS LOCUS STANDI TO BRING THIS SUIT;
V. WHETHER THE CONSTITUTIONAL RIGHT TO INFORMATION INCLUDES OFFICIAL INFORMATION ON
ON-GOING NEGOTIATIONS BEFORE A FINAL AGREEMENT;
VI. WHETHER THE STIPULATIONS IN THE AMENDED JOINT VENTURE AGREEMENT FOR THE
TRANSFER TO AMARI OF CERTAIN LANDS, RECLAIMED AND STILL TO BE RECLAIMED, VIOLATE THE
1987 CONSTITUTION; AND
VII. WHETHER THE COURT IS THE PROPER FORUM FOR RAISING THE ISSUE OF WHETHER THE
AMENDED JOINT VENTURE AGREEMENT IS GROSSLY DISADVANTAGEOUS TO THE GOVERNMENT.
The Court's Ruling
First issue: whether the principal reliefs prayed for in the petition are moot and academic because of
subsequent events.
The petition prays that PEA publicly disclose the "terms and conditions of the on-going negotiations for a new
agreement." The petition also prays that the Court enjoin PEA from "privately entering into, perfecting and/or
executing any new agreement with AMARI."
PEA and AMARI claim the petition is now moot and academic because AMARI furnished petitioner on June 21, 1999
a copy of the signed Amended JVA containing the terms and conditions agreed upon in the renegotiations. Thus, PEA
has satisfied petitioner's prayer for a public disclosure of the renegotiations. Likewise, petitioner's prayer to enjoin the
signing of the Amended JVA is now moot because PEA and AMARI have already signed the Amended JVA on March
30, 1999. Moreover, the Office of the President has approved the Amended JVA on May 28, 1999.

98
Petitioner counters that PEA and AMARI cannot avoid the constitutional issue by simply fast-tracking the signing and
approval of the Amended JVA before the Court could act on the issue. Presidential approval does not resolve the
constitutional issue or remove it from the ambit of judicial review.
We rule that the signing of the Amended JVA by PEA and AMARI and its approval by the President cannot operate to
moot the petition and divest the Court of its jurisdiction. PEA and AMARI have still to implement the Amended JVA.
The prayer to enjoin the signing of the Amended JVA on constitutional grounds necessarily includes preventing its
implementation if in the meantime PEA and AMARI have signed one in violation of the Constitution. Petitioner's
principal basis in assailing the renegotiation of the JVA is its violation of Section 3, Article XII of the Constitution, which
prohibits the government from alienating lands of the public domain to private corporations. If the Amended JVA
indeed violates the Constitution, it is the duty of the Court to enjoin its implementation, and if already implemented, to
annul the effects of such unconstitutional contract.
The Amended JVA is not an ordinary commercial contract but one which seeks to transfer title and ownership to
367.5 hectares of reclaimed lands and submerged areas of Manila Bay to a single private corporation. It now
becomes more compelling for the Court to resolve the issue to insure the government itself does not violate a
provision of the Constitution intended to safeguard the national patrimony. Supervening events, whether intended or
accidental, cannot prevent the Court from rendering a decision if there is a grave violation of the Constitution. In the
instant case, if the Amended JVA runs counter to the Constitution, the Court can still prevent the transfer of title and
ownership of alienable lands of the public domain in the name of AMARI. Even in cases where supervening events
had made the cases moot, the Court did not hesitate to resolve the legal or constitutional issues raised to formulate
controlling principles to guide the bench, bar, and the public. 17
Also, the instant petition is a case of first impression. All previous decisions of the Court involving Section 3, Article XII
of the 1987 Constitution, or its counterpart provision in the 1973 Constitution, 18 covered agricultural landssold to
private corporations which acquired the lands from private parties. The transferors of the private corporations claimed
or could claim the right to judicial confirmation of their imperfect titles19 under Title II of Commonwealth Act. 141
("CA No. 141" for brevity). In the instant case, AMARI seeks to acquire from PEA, a public corporation, reclaimed
lands and submerged areas for non-agricultural purposes by purchase under PD No. 1084 (charter of PEA)
and Title III of CA No. 141. Certain undertakings by AMARI under the Amended JVA constitute the consideration for
the purchase. Neither AMARI nor PEA can claim judicial confirmation of their titles because the lands covered by the
Amended JVA are newly reclaimed or still to be reclaimed. Judicial confirmation of imperfect title requires open,
continuous, exclusive and notorious occupation of agricultural lands of the public domain for at least thirty years since
June 12, 1945 or earlier. Besides, the deadline for filing applications for judicial confirmation of imperfect title expired
on December 31, 1987.20
Lastly, there is a need to resolve immediately the constitutional issue raised in this petition because of the possible
transfer at any time by PEA to AMARI of title and ownership to portions of the reclaimed lands. Under the Amended
JVA, PEA is obligated to transfer to AMARI the latter's seventy percent proportionate share in the reclaimed areas as
the reclamation progresses. The Amended JVA even allows AMARI to mortgage at any time the entirereclaimed area
to raise financing for the reclamation project.21
Second issue: whether the petition merits dismissal for failing to observe the principle governing the
hierarchy of courts.
PEA and AMARI claim petitioner ignored the judicial hierarchy by seeking relief directly from the Court. The principle
of hierarchy of courts applies generally to cases involving factual questions. As it is not a trier of facts, the Court
cannot entertain cases involving factual issues. The instant case, however, raises constitutional issues of
transcendental importance to the public.22 The Court can resolve this case without determining any factual issue
related to the case. Also, the instant case is a petition for mandamus which falls under the original jurisdiction of the
Court under Section 5, Article VIII of the Constitution. We resolve to exercise primary jurisdiction over the instant
case.
Third issue: whether the petition merits dismissal for non-exhaustion of administrative remedies.
PEA faults petitioner for seeking judicial intervention in compelling PEA to disclose publicly certain information without
first asking PEA the needed information. PEA claims petitioner's direct resort to the Court violates the principle of
exhaustion of administrative remedies. It also violates the rule that mandamus may issue only if there is no other
plain, speedy and adequate remedy in the ordinary course of law.
PEA distinguishes the instant case from Taada v. Tuvera23 where the Court granted the petition for mandamus even
if the petitioners there did not initially demand from the Office of the President the publication of the presidential
decrees. PEA points out that in Taada, the Executive Department had an affirmative statutory duty under Article 2
of the Civil Code24 and Section 1 of Commonwealth Act No. 63825 to publish the presidential decrees. There was,
therefore, no need for the petitioners in Taada to make an initial demand from the Office of the President. In the
instant case, PEA claims it has no affirmative statutory duty to disclose publicly information about its renegotiation of

99
the JVA. Thus, PEA asserts that the Court must apply the principle of exhaustion of administrative remedies to the
instant case in view of the failure of petitioner here to demand initially from PEA the needed information.
The original JVA sought to dispose to AMARI public lands held by PEA, a government corporation. Under Section 79
of the Government Auditing Code, 26 the disposition of government lands to private parties requires public
bidding. PEA was under a positive legal duty to disclose to the public the terms and conditions for the sale of
its lands. The law obligated PEA to make this public disclosure even without demand from petitioner or from anyone.
PEA failed to make this public disclosure because the original JVA, like the Amended JVA, was the result of
a negotiated contract, not of a public bidding. Considering that PEA had an affirmative statutory duty to make the
public disclosure, and was even in breach of this legal duty, petitioner had the right to seek direct judicial intervention.
Moreover, and this alone is determinative of this issue, the principle of exhaustion of administrative remedies does not
apply when the issue involved is a purely legal or constitutional question. 27 The principal issue in the instant case is
the capacity of AMARI to acquire lands held by PEA in view of the constitutional ban prohibiting the alienation of lands
of the public domain to private corporations. We rule that the principle of exhaustion of administrative remedies does
not apply in the instant case.
Fourth issue: whether petitioner has locus standi to bring this suit
PEA argues that petitioner has no standing to institute mandamus proceedings to enforce his constitutional right to
information without a showing that PEA refused to perform an affirmative duty imposed on PEA by the Constitution.
PEA also claims that petitioner has not shown that he will suffer any concrete injury because of the signing or
implementation of the Amended JVA. Thus, there is no actual controversy requiring the exercise of the power of
judicial review.
The petitioner has standing to bring this taxpayer's suit because the petition seeks to compel PEA to comply with its
constitutional duties. There are two constitutional issues involved here. First is the right of citizens to information on
matters of public concern. Second is the application of a constitutional provision intended to insure the equitable
distribution of alienable lands of the public domain among Filipino citizens. The thrust of the first issue is to compel
PEA to disclose publicly information on the sale of government lands worth billions of pesos, information which the
Constitution and statutory law mandate PEA to disclose. The thrust of the second issue is to prevent PEA from
alienating hundreds of hectares of alienable lands of the public domain in violation of the Constitution, compelling
PEA to comply with a constitutional duty to the nation.
Moreover, the petition raises matters of transcendental importance to the public. In Chavez v. PCGG,28 the Court
upheld the right of a citizen to bring a taxpayer's suit on matters of transcendental importance to the public, thus "Besides, petitioner emphasizes, the matter of recovering the ill-gotten wealth of the Marcoses is an issue of
'transcendental importance to the public.' He asserts that ordinary taxpayers have a right to initiate and
prosecute actions questioning the validity of acts or orders of government agencies or instrumentalities, if the
issues raised are of 'paramount public interest,' and if they 'immediately affect the social, economic and moral
well being of the people.'
Moreover, the mere fact that he is a citizen satisfies the requirement of personal interest, when the proceeding
involves the assertion of a public right, such as in this case. He invokes several decisions of this Court which
have set aside the procedural matter of locus standi, when the subject of the case involved public interest.
xxx
In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties in
interest; and because it is sufficient that petitioner is a citizen and as such is interested in the execution of the
laws, he need not show that he has any legal or special interest in the result of the action. In the aforesaid
case, the petitioners sought to enforce their right to be informed on matters of public concern, a right then
recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be
valid and enforceable must be published in the Official Gazette or otherwise effectively promulgated. In ruling
for the petitioners' legal standing, the Court declared that the right they sought to be enforced 'is a public right
recognized by no less than the fundamental law of the land.'
Legaspi v. Civil Service Commission, while reiterating Taada, further declared that 'when a mandamus
proceeding involves the assertion of a public right, the requirement of personal interest is satisfied by the
mere fact that petitioner is a citizen and, therefore, part of the general 'public' which possesses the right.'
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under
the questioned contract for the development, management and operation of the Manila International
Container Terminal, 'public interest [was] definitely involved considering the important role [of the subject
contract] . . . in the economic development of the country and the magnitude of the financial consideration

100
involved.' We concluded that, as a consequence, the disclosure provision in the Constitution would constitute
sufficient authority for upholding the petitioner's standing.
Similarly, the instant petition is anchored on the right of the people to information and access to official
records, documents and papers a right guaranteed under Section 7, Article III of the 1987 Constitution.
Petitioner, a former solicitor general, is a Filipino citizen. Because of the satisfaction of the two basic
requisites laid down by decisional law to sustain petitioner's legal standing, i.e. (1) the enforcement of a public
right (2) espoused by a Filipino citizen, we rule that the petition at bar should be allowed."
We rule that since the instant petition, brought by a citizen, involves the enforcement of constitutional rights - to
information and to the equitable diffusion of natural resources - matters of transcendental public importance, the
petitioner has the requisite locus standi.
Fifth issue: whether the constitutional right to information includes official information on on-going
negotiations before a final agreement.
Section 7, Article III of the Constitution explains the people's right to information on matters of public concern in this
manner:
"Sec. 7. The right of the people to information on matters of public concern shall be recognized. Access to
official records, and to documents, and papers pertaining to official acts, transactions, or decisions,
as well as to government research data used as basis for policy development, shall be afforded the citizen,
subject to such limitations as may be provided by law." (Emphasis supplied)
The State policy of full transparency in all transactions involving public interest reinforces the people's right to
information on matters of public concern. This State policy is expressed in Section 28, Article II of the Constitution,
thus:
"Sec. 28. Subject to reasonable conditions prescribed by law, the State adopts and implements a policy of
full public disclosure of all its transactions involving public interest." (Emphasis supplied)
These twin provisions of the Constitution seek to promote transparency in policy-making and in the operations of the
government, as well as provide the people sufficient information to exercise effectively other constitutional rights.
These twin provisions are essential to the exercise of freedom of expression. If the government does not disclose its
official acts, transactions and decisions to citizens, whatever citizens say, even if expressed without any restraint, will
be speculative and amount to nothing. These twin provisions are also essential to hold public officials "at all times x x
x accountable to the people,"29 for unless citizens have the proper information, they cannot hold public officials
accountable for anything. Armed with the right information, citizens can participate in public discussions leading to the
formulation of government policies and their effective implementation. An informed citizenry is essential to the
existence and proper functioning of any democracy. As explained by the Court inValmonte v. Belmonte, Jr.30
"An essential element of these freedoms is to keep open a continuing dialogue or process of communication
between the government and the people. It is in the interest of the State that the channels for free political
discussion be maintained to the end that the government may perceive and be responsive to the people's will.
Yet, this open dialogue can be effective only to the extent that the citizenry is informed and thus able to
formulate its will intelligently. Only when the participants in the discussion are aware of the issues and have
access to information relating thereto can such bear fruit."
PEA asserts, citing Chavez v. PCGG,31 that in cases of on-going negotiations the right to information is limited to
"definite propositions of the government." PEA maintains the right does not include access to "intra-agency or interagency recommendations or communications during the stage when common assertions are still in the process of
being formulated or are in the 'exploratory stage'."
Also, AMARI contends that petitioner cannot invoke the right at the pre-decisional stage or before the closing of the
transaction. To support its contention, AMARI cites the following discussion in the 1986 Constitutional Commission:
"Mr. Suarez. And when we say 'transactions' which should be distinguished from contracts, agreements, or
treaties or whatever, does the Gentleman refer to the steps leading to the consummation of the contract, or
does he refer to the contract itself?
Mr. Ople: The 'transactions' used here, I suppose is generic and therefore, it can cover both steps
leading to a contract and already a consummated contract, Mr. Presiding Officer.
Mr. Suarez: This contemplates inclusion of negotiations leading to the consummation of the
transaction.

101
Mr. Ople: Yes, subject only to reasonable safeguards on the national interest.
Mr. Suarez: Thank you."32 (Emphasis supplied)
AMARI argues there must first be a consummated contract before petitioner can invoke the right. Requiring
government officials to reveal their deliberations at the pre-decisional stage will degrade the quality of decisionmaking in government agencies. Government officials will hesitate to express their real sentiments during
deliberations if there is immediate public dissemination of their discussions, putting them under all kinds of pressure
before they decide.
We must first distinguish between information the law on public bidding requires PEA to disclose publicly, and
information the constitutional right to information requires PEA to release to the public. Before the consummation of
the contract, PEA must, on its own and without demand from anyone, disclose to the public matters relating to the
disposition of its property. These include the size, location, technical description and nature of the property being
disposed of, the terms and conditions of the disposition, the parties qualified to bid, the minimum price and similar
information. PEA must prepare all these data and disclose them to the public at the start of the disposition process,
long before the consummation of the contract, because the Government Auditing Code requires public bidding. If
PEA fails to make this disclosure, any citizen can demand from PEA this information at any time during the bidding
process.
Information, however, on on-going evaluation or review of bids or proposals being undertaken by the bidding or
review committee is not immediately accessible under the right to information. While the evaluation or review is still
on-going, there are no "official acts, transactions, or decisions" on the bids or proposals. However, once the
committee makes its official recommendation, there arises a "definite proposition" on the part of the government.
From this moment, the public's right to information attaches, and any citizen can access all the non-proprietary
information leading to such definite proposition. In Chavez v. PCGG,33 the Court ruled as follows:
"Considering the intent of the framers of the Constitution, we believe that it is incumbent upon the PCGG and
its officers, as well as other government representatives, to disclose sufficient public information on any
proposed settlement they have decided to take up with the ostensible owners and holders of ill-gotten wealth.
Such information, though, must pertain to definite propositions of the government, not necessarily to intraagency or inter-agency recommendations or communications during the stage when common assertions are
still in the process of being formulated or are in the "exploratory" stage. There is need, of course, to observe
the same restrictions on disclosure of information in general, as discussed earlier such as on matters
involving national security, diplomatic or foreign relations, intelligence and other classified information."
(Emphasis supplied)
Contrary to AMARI's contention, the commissioners of the 1986 Constitutional Commission understood that the right
to information "contemplates inclusion of negotiations leading to the consummation of the
transaction." Certainly, a consummated contract is not a requirement for the exercise of the right to information.
Otherwise, the people can never exercise the right if no contract is consummated, and if one is consummated, it may
be too late for the public to expose its defects.1wphi1.nt
Requiring a consummated contract will keep the public in the dark until the contract, which may be grossly
disadvantageous to the government or even illegal, becomes a fait accompli. This negates the State policy of full
transparency on matters of public concern, a situation which the framers of the Constitution could not have intended.
Such a requirement will prevent the citizenry from participating in the public discussion of any proposedcontract,
effectively truncating a basic right enshrined in the Bill of Rights. We can allow neither an emasculation of a
constitutional right, nor a retreat by the State of its avowed "policy of full disclosure of all its transactions involving
public interest."
The right covers three categories of information which are "matters of public concern," namely: (1) official records; (2)
documents and papers pertaining to official acts, transactions and decisions; and (3) government research data used
in formulating policies. The first category refers to any document that is part of the public records in the custody of
government agencies or officials. The second category refers to documents and papers recording, evidencing,
establishing, confirming, supporting, justifying or explaining official acts, transactions or decisions of government
agencies or officials. The third category refers to research data, whether raw, collated or processed, owned by the
government and used in formulating government policies.
The information that petitioner may access on the renegotiation of the JVA includes evaluation reports,
recommendations, legal and expert opinions, minutes of meetings, terms of reference and other documents attached
to such reports or minutes, all relating to the JVA. However, the right to information does not compel PEA to prepare
lists, abstracts, summaries and the like relating to the renegotiation of the JVA. 34 The right only affords access to
records, documents and papers, which means the opportunity to inspect and copy them. One who exercises the right
must copy the records, documents and papers at his expense. The exercise of the right is also subject to reasonable
regulations to protect the integrity of the public records and to minimize disruption to government operations, like rules
specifying when and how to conduct the inspection and copying. 35

102
The right to information, however, does not extend to matters recognized as privileged information under the
separation of powers.36 The right does not also apply to information on military and diplomatic secrets, information
affecting national security, and information on investigations of crimes by law enforcement agencies before the
prosecution of the accused, which courts have long recognized as confidential. 37 The right may also be subject to
other limitations that Congress may impose by law.
There is no claim by PEA that the information demanded by petitioner is privileged information rooted in the
separation of powers. The information does not cover Presidential conversations, correspondences, or discussions
during closed-door Cabinet meetings which, like internal deliberations of the Supreme Court and other collegiate
courts, or executive sessions of either house of Congress, 38 are recognized as confidential. This kind of information
cannot be pried open by a co-equal branch of government. A frank exchange of exploratory ideas and assessments,
free from the glare of publicity and pressure by interested parties, is essential to protect the independence of
decision-making of those tasked to exercise Presidential, Legislative and Judicial power.39 This is not the situation in
the instant case.
We rule, therefore, that the constitutional right to information includes official information on on-going
negotiations before a final contract. The information, however, must constitute definite propositions by the
government and should not cover recognized exceptions like privileged information, military and diplomatic secrets
and similar matters affecting national security and public order.40 Congress has also prescribed other limitations on
the right to information in several legislations.41
Sixth issue: whether stipulations in the Amended JVA for the transfer to AMARI of lands, reclaimed or to be
reclaimed, violate the Constitution.
The Regalian Doctrine
The ownership of lands reclaimed from foreshore and submerged areas is rooted in the Regalian doctrine which
holds that the State owns all lands and waters of the public domain. Upon the Spanish conquest of the Philippines,
ownership of all "lands, territories and possessions" in the Philippines passed to the Spanish Crown. 42 The King, as
the sovereign ruler and representative of the people, acquired and owned all lands and territories in the Philippines
except those he disposed of by grant or sale to private individuals.
The 1935, 1973 and 1987 Constitutions adopted the Regalian doctrine substituting, however, the State, in lieu of the
King, as the owner of all lands and waters of the public domain. The Regalian doctrine is the foundation of the timehonored principle of land ownership that "all lands that were not acquired from the Government, either by purchase or
by grant, belong to the public domain."43 Article 339 of the Civil Code of 1889, which is now Article 420 of the Civil
Code of 1950, incorporated the Regalian doctrine.
Ownership and Disposition of Reclaimed Lands
The Spanish Law of Waters of 1866 was the first statutory law governing the ownership and disposition of reclaimed
lands in the Philippines. On May 18, 1907, the Philippine Commission enacted Act No. 1654 which provided for the
lease, but not the sale, of reclaimed lands of the government to corporations and individuals. Later, on
November 29, 1919, the Philippine Legislature approved Act No. 2874, the Public Land Act, which authorized the
lease, but not the sale, of reclaimed lands of the government to corporations and individuals. On November 7,
1936, the National Assembly passed Commonwealth Act No. 141, also known as the Public Land Act,
which authorized the lease, but not the sale, of reclaimed lands of the government to corporations and
individuals. CA No. 141 continues to this day as the general law governing the classification and disposition of lands
of the public domain.
The Spanish Law of Waters of 1866 and the Civil Code of 1889
Under the Spanish Law of Waters of 1866, the shores, bays, coves, inlets and all waters within the maritime zone of
the Spanish territory belonged to the public domain for public use. 44 The Spanish Law of Waters of 1866 allowed the
reclamation of the sea under Article 5, which provided as follows:
"Article 5. Lands reclaimed from the sea in consequence of works constructed by the State, or by the
provinces, pueblos or private persons, with proper permission, shall become the property of the party
constructing such works, unless otherwise provided by the terms of the grant of authority."
Under the Spanish Law of Waters, land reclaimed from the sea belonged to the party undertaking the reclamation,
provided the government issued the necessary permit and did not reserve ownership of the reclaimed land to the
State.
Article 339 of the Civil Code of 1889 defined property of public dominion as follows:

103
"Art. 339. Property of public dominion is
1. That devoted to public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the
State, riverbanks, shores, roadsteads, and that of a similar character;
2. That belonging exclusively to the State which, without being of general public use, is employed in some
public service, or in the development of the national wealth, such as walls, fortresses, and other works for the
defense of the territory, and mines, until granted to private individuals."
Property devoted to public use referred to property open for use by the public. In contrast, property devoted to public
service referred to property used for some specific public service and open only to those authorized to use the
property.
Property of public dominion referred not only to property devoted to public use, but also to property not so used but
employed to develop the national wealth. This class of property constituted property of public dominion although
employed for some economic or commercial activity to increase the national wealth.
Article 341 of the Civil Code of 1889 governed the re-classification of property of public dominion into private property,
to wit:
"Art. 341. Property of public dominion, when no longer devoted to public use or to the defense of the territory,
shall become a part of the private property of the State."
This provision, however, was not self-executing. The legislature, or the executive department pursuant to law, must
declare the property no longer needed for public use or territorial defense before the government could lease or
alienate the property to private parties.45
Act No. 1654 of the Philippine Commission
On May 8, 1907, the Philippine Commission enacted Act No. 1654 which regulated the lease of reclaimed and
foreshore lands. The salient provisions of this law were as follows:
"Section 1. The control and disposition of the foreshore as defined in existing law, and the title to all
Government or public lands made or reclaimed by the Government by dredging or filling or otherwise
throughout the Philippine Islands, shall be retained by the Government without prejudice to vested rights
and without prejudice to rights conceded to the City of Manila in the Luneta Extension.
Section 2. (a) The Secretary of the Interior shall cause all Government or public lands made or reclaimed by
the Government by dredging or filling or otherwise to be divided into lots or blocks, with the necessary streets
and alleyways located thereon, and shall cause plats and plans of such surveys to be prepared and filed with
the Bureau of Lands.
(b) Upon completion of such plats and plans the Governor-General shall give notice to the public that
such parts of the lands so made or reclaimed as are not needed for public purposes will be leased for
commercial and business purposes, x x x.
xxx
(e) The leases above provided for shall be disposed of to the highest and best bidder therefore, subject
to such regulations and safeguards as the Governor-General may by executive order prescribe." (Emphasis
supplied)
Act No. 1654 mandated that the government should retain title to all lands reclaimed by the government. The
Act also vested in the government control and disposition of foreshore lands. Private parties could lease lands
reclaimed by the government only if these lands were no longer needed for public purpose. Act No. 1654
mandated public bidding in the lease of government reclaimed lands. Act No. 1654 made government reclaimed
lands sui generis in that unlike other public lands which the government could sell to private parties, these reclaimed
lands were available only for lease to private parties.
Act No. 1654, however, did not repeal Section 5 of the Spanish Law of Waters of 1866. Act No. 1654 did not prohibit
private parties from reclaiming parts of the sea under Section 5 of the Spanish Law of Waters. Lands reclaimed from
the sea by private parties with government permission remained private lands.
Act No. 2874 of the Philippine Legislature

104
On November 29, 1919, the Philippine Legislature enacted Act No. 2874, the Public Land Act. 46 The salient provisions
of Act No. 2874, on reclaimed lands, were as follows:
"Sec. 6. The Governor-General, upon the recommendation of the Secretary of Agriculture and Natural
Resources, shall from time to time classify the lands of the public domain into
(a) Alienable or disposable,
(b) Timber, and
(c) Mineral lands, x x x.
Sec. 7. For the purposes of the government and disposition of alienable or disposable public lands, the
Governor-General, upon recommendation by the Secretary of Agriculture and Natural Resources,
shall from time to time declare what lands are open to disposition or concession under this Act."
Sec. 8. Only those lands shall be declared open to disposition or concession which have been
officially delimited or classified x x x.
xxx
Sec. 55. Any tract of land of the public domain which, being neither timber nor mineral land, shall be classified
as suitable for residential purposes or for commercial, industrial, or other productive purposes other
than agricultural purposes, and shall be open to disposition or concession, shall be disposed of under the
provisions of this chapter, and not otherwise.
Sec. 56. The lands disposable under this title shall be classified as follows:
(a) Lands reclaimed by the Government by dredging, filling, or other means;
(b) Foreshore;
(c) Marshy lands or lands covered with water bordering upon the shores or banks of navigable lakes
or rivers;
(d) Lands not included in any of the foregoing classes.
x x x.
Sec. 58. The lands comprised in classes (a), (b), and (c) of section fifty-six shall be disposed of to
private parties by lease only and not otherwise, as soon as the Governor-General, upon
recommendation by the Secretary of Agriculture and Natural Resources, shall declare that the same
are not necessary for the public service and are open to disposition under this chapter. The lands
included in class (d) may be disposed of by sale or lease under the provisions of this Act." (Emphasis
supplied)
Section 6 of Act No. 2874 authorized the Governor-General to "classify lands of the public domain into x x x alienable
or disposable"47 lands. Section 7 of the Act empowered the Governor-General to "declare what lands are open to
disposition or concession." Section 8 of the Act limited alienable or disposable lands only to those lands which have
been "officially delimited and classified."
Section 56 of Act No. 2874 stated that lands "disposable under this title 48 shall be classified" as government
reclaimed, foreshore and marshy lands, as well as other lands. All these lands, however, must be suitable for
residential, commercial, industrial or other productive non-agricultural purposes. These provisions vested upon the
Governor-General the power to classify inalienable lands of the public domain into disposable lands of the public
domain. These provisions also empowered the Governor-General to classify further such disposable lands of the
public domain into government reclaimed, foreshore or marshy lands of the public domain, as well as other nonagricultural lands.
Section 58 of Act No. 2874 categorically mandated that disposable lands of the public domain classified as
government reclaimed, foreshore and marshy lands "shall be disposed of to private parties by lease only and not
otherwise." The Governor-General, before allowing the lease of these lands to private parties, must formally declare
that the lands were "not necessary for the public service." Act No. 2874 reiterated the State policy to lease and not to
sell government reclaimed, foreshore and marshy lands of the public domain, a policy first enunciated in 1907 in Act
No. 1654. Government reclaimed, foreshore and marshy lands remained sui generis, as the only alienable or
disposable lands of the public domain that the government could not sell to private parties.

105
The rationale behind this State policy is obvious. Government reclaimed, foreshore and marshy public lands for nonagricultural purposes retain their inherent potential as areas for public service. This is the reason the government
prohibited the sale, and only allowed the lease, of these lands to private parties. The State always reserved these
lands for some future public service.
Act No. 2874 did not authorize the reclassification of government reclaimed, foreshore and marshy lands into other
non-agricultural lands under Section 56 (d). Lands falling under Section 56 (d) were the only lands for non-agricultural
purposes the government could sell to private parties. Thus, under Act No. 2874, the government could not sell
government reclaimed, foreshore and marshy lands to private parties, unless the legislature passed a law
allowing their sale.49
Act No. 2874 did not prohibit private parties from reclaiming parts of the sea pursuant to Section 5 of the Spanish Law
of Waters of 1866. Lands reclaimed from the sea by private parties with government permission remained private
lands.
Dispositions under the 1935 Constitution
On May 14, 1935, the 1935 Constitution took effect upon its ratification by the Filipino people. The 1935 Constitution,
in adopting the Regalian doctrine, declared in Section 1, Article XIII, that
"Section 1. All agricultural, timber, and mineral lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy and other natural resources of the Philippines belong to
the State, and their disposition, exploitation, development, or utilization shall be limited to citizens of the
Philippines or to corporations or associations at least sixty per centum of the capital of which is owned by
such citizens, subject to any existing right, grant, lease, or concession at the time of the inauguration of the
Government established under this Constitution. Natural resources, with the exception of public
agricultural land, shall not be alienated, and no license, concession, or lease for the exploitation,
development, or utilization of any of the natural resources shall be granted for a period exceeding twenty-five
years, renewable for another twenty-five years, except as to water rights for irrigation, water supply, fisheries,
or industrial uses other than the development of water power, in which cases beneficial use may be the
measure and limit of the grant." (Emphasis supplied)
The 1935 Constitution barred the alienation of all natural resources except public agricultural lands, which were the
only natural resources the State could alienate. Thus, foreshore lands, considered part of the State's natural
resources, became inalienable by constitutional fiat, available only for lease for 25 years, renewable for another 25
years. The government could alienate foreshore lands only after these lands were reclaimed and classified as
alienable agricultural lands of the public domain. Government reclaimed and marshy lands of the public domain,
being neither timber nor mineral lands, fell under the classification of public agricultural lands. 50 However, government
reclaimed and marshy lands, although subject to classification as disposable public agricultural lands, could only be
leased and not sold to private parties because of Act No. 2874.
The prohibition on private parties from acquiring ownership of government reclaimed and marshy lands of the public
domain was only a statutory prohibition and the legislature could therefore remove such prohibition. The 1935
Constitution did not prohibit individuals and corporations from acquiring government reclaimed and marshy lands of
the public domain that were classified as agricultural lands under existing public land laws. Section 2, Article XIII of
the 1935 Constitution provided as follows:
"Section 2. No private corporation or association may acquire, lease, or hold public agricultural lands
in excess of one thousand and twenty four hectares, nor may any individual acquire such lands by
purchase in excess of one hundred and forty hectares, or by lease in excess of one thousand and
twenty-four hectares, or by homestead in excess of twenty-four hectares. Lands adapted to grazing, not
exceeding two thousand hectares, may be leased to an individual, private corporation, or association."
(Emphasis supplied)
Still, after the effectivity of the 1935 Constitution, the legislature did not repeal Section 58 of Act No. 2874 to open for
sale to private parties government reclaimed and marshy lands of the public domain. On the contrary, the legislature
continued the long established State policy of retaining for the government title and ownership of government
reclaimed and marshy lands of the public domain.
Commonwealth Act No. 141 of the Philippine National Assembly
On November 7, 1936, the National Assembly approved Commonwealth Act No. 141, also known as the Public Land
Act, which compiled the then existing laws on lands of the public domain. CA No. 141, as amended, remains to this
day the existing general law governing the classification and disposition of lands of the public domain other than
timber and mineral lands.51

106
Section 6 of CA No. 141 empowers the President to classify lands of the public domain into "alienable or
disposable"52 lands of the public domain, which prior to such classification are inalienable and outside the commerce
of man. Section 7 of CA No. 141 authorizes the President to "declare what lands are open to disposition or
concession." Section 8 of CA No. 141 states that the government can declare open for disposition or concession only
lands that are "officially delimited and classified." Sections 6, 7 and 8 of CA No. 141 read as follows:
"Sec. 6. The President, upon the recommendation of the Secretary of Agriculture and Commerce, shall
from time to time classify the lands of the public domain into
(a) Alienable or disposable,
(b) Timber, and
(c) Mineral lands,
and may at any time and in like manner transfer such lands from one class to another,53 for the purpose of
their administration and disposition.
Sec. 7. For the purposes of the administration and disposition of alienable or disposable public lands, the
President, upon recommendation by the Secretary of Agriculture and Commerce, shall from time to
time declare what lands are open to disposition or concession under this Act.
Sec. 8. Only those lands shall be declared open to disposition or concession which have been
officially delimited and classified and, when practicable, surveyed, and which have not been reserved
for public or quasi-public uses, nor appropriated by the Government, nor in any manner become private
property, nor those on which a private right authorized and recognized by this Act or any other valid law may
be claimed, or which, having been reserved or appropriated, have ceased to be so. x x x."
Thus, before the government could alienate or dispose of lands of the public domain, the President must first officially
classify these lands as alienable or disposable, and then declare them open to disposition or concession. There must
be no law reserving these lands for public or quasi-public uses.
The salient provisions of CA No. 141, on government reclaimed, foreshore and marshy lands of the public domain,
are as follows:
"Sec. 58. Any tract of land of the public domain which, being neither timber nor mineral land, is
intended to be used for residential purposes or for commercial, industrial, or other productive
purposes other than agricultural, and is open to disposition or concession, shall be disposed of
under the provisions of this chapter and not otherwise.
Sec. 59. The lands disposable under this title shall be classified as follows:
(a) Lands reclaimed by the Government by dredging, filling, or other means;
(b) Foreshore;
(c) Marshy lands or lands covered with water bordering upon the shores or banks of navigable lakes
or rivers;
(d) Lands not included in any of the foregoing classes.
Sec. 60. Any tract of land comprised under this title may be leased or sold, as the case may be, to any
person, corporation, or association authorized to purchase or lease public lands for agricultural purposes. x x
x.
Sec. 61. The lands comprised in classes (a), (b), and (c) of section fifty-nine shall be disposed of to
private parties by lease only and not otherwise, as soon as the President, upon recommendation by the
Secretary of Agriculture, shall declare that the same are not necessary for the public service and are
open to disposition under this chapter. The lands included in class (d) may be disposed of by sale or
lease under the provisions of this Act." (Emphasis supplied)
Section 61 of CA No. 141 readopted, after the effectivity of the 1935 Constitution, Section 58 of Act No. 2874
prohibiting the sale of government reclaimed, foreshore and marshy disposable lands of the public domain. All these
lands are intended for residential, commercial, industrial or other non-agricultural purposes. As before, Section 61
allowed only the lease of such lands to private parties. The government could sell to private parties only lands falling
under Section 59 (d) of CA No. 141, or those lands for non-agricultural purposes not classified as government

107
reclaimed, foreshore and marshy disposable lands of the public domain. Foreshore lands, however, became
inalienable under the 1935 Constitution which only allowed the lease of these lands to qualified private parties.
Section 58 of CA No. 141 expressly states that disposable lands of the public domain intended for residential,
commercial, industrial or other productive purposes other than agricultural "shall be disposed of under the
provisions of this chapter and not otherwise." Under Section 10 of CA No. 141, the term "disposition" includes
lease of the land. Any disposition of government reclaimed, foreshore and marshy disposable lands for nonagricultural purposes must comply with Chapter IX, Title III of CA No. 141, 54 unless a subsequent law amended or
repealed these provisions.
In his concurring opinion in the landmark case of Republic Real Estate Corporation v. Court of Appeals,55Justice
Reynato S. Puno summarized succinctly the law on this matter, as follows:
"Foreshore lands are lands of public dominion intended for public use. So too are lands reclaimed by the
government by dredging, filling, or other means. Act 1654 mandated that the control and disposition of the
foreshore and lands under water remained in the national government. Said law allowed only the 'leasing' of
reclaimed land. The Public Land Acts of 1919 and 1936 also declared that the foreshore and lands reclaimed
by the government were to be "disposed of to private parties by lease only and not otherwise." Before leasing,
however, the Governor-General, upon recommendation of the Secretary of Agriculture and Natural
Resources, had first to determine that the land reclaimed was not necessary for the public service. This
requisite must have been met before the land could be disposed of. But even then, the foreshore and lands
under water were not to be alienated and sold to private parties. The disposition of the reclaimed land
was only by lease. The land remained property of the State." (Emphasis supplied)
As observed by Justice Puno in his concurring opinion, "Commonwealth Act No. 141 has remained in effect at
present."
The State policy prohibiting the sale to private parties of government reclaimed, foreshore and marshy alienable lands
of the public domain, first implemented in 1907 was thus reaffirmed in CA No. 141 after the 1935 Constitution took
effect. The prohibition on the sale of foreshore lands, however, became a constitutional edict under the 1935
Constitution. Foreshore lands became inalienable as natural resources of the State, unless reclaimed by the
government and classified as agricultural lands of the public domain, in which case they would fall under the
classification of government reclaimed lands.
After the effectivity of the 1935 Constitution, government reclaimed and marshy disposable lands of the public domain
continued to be only leased and not sold to private parties. 56 These lands remained sui generis, as the only alienable
or disposable lands of the public domain the government could not sell to private parties.
Since then and until now, the only way the government can sell to private parties government reclaimed and marshy
disposable lands of the public domain is for the legislature to pass a law authorizing such sale. CA No. 141 does not
authorize the President to reclassify government reclaimed and marshy lands into other non-agricultural lands under
Section 59 (d). Lands classified under Section 59 (d) are the only alienable or disposable lands for non-agricultural
purposes that the government could sell to private parties.
Moreover, Section 60 of CA No. 141 expressly requires congressional authority before lands under Section 59 that
the government previously transferred to government units or entities could be sold to private parties. Section 60 of
CA No. 141 declares that
"Sec. 60. x x x The area so leased or sold shall be such as shall, in the judgment of the Secretary of
Agriculture and Natural Resources, be reasonably necessary for the purposes for which such sale or lease is
requested, and shall not exceed one hundred and forty-four hectares: Provided, however, That this limitation
shall not apply to grants, donations, or transfers made to a province, municipality or branch or subdivision of
the Government for the purposes deemed by said entities conducive to the public interest;but the land so
granted, donated, or transferred to a province, municipality or branch or subdivision of the
Government shall not be alienated, encumbered, or otherwise disposed of in a manner affecting its
title, except when authorized by Congress: x x x." (Emphasis supplied)
The congressional authority required in Section 60 of CA No. 141 mirrors the legislative authority required in Section
56 of Act No. 2874.
One reason for the congressional authority is that Section 60 of CA No. 141 exempted government units and entities
from the maximum area of public lands that could be acquired from the State. These government units and entities
should not just turn around and sell these lands to private parties in violation of constitutional or statutory limitations.
Otherwise, the transfer of lands for non-agricultural purposes to government units and entities could be used to
circumvent constitutional limitations on ownership of alienable or disposable lands of the public domain. In the same
manner, such transfers could also be used to evade the statutory prohibition in CA No. 141 on the sale of government

108
reclaimed and marshy lands of the public domain to private parties. Section 60 of CA No. 141 constitutes by operation
of law a lien on these lands.57
In case of sale or lease of disposable lands of the public domain falling under Section 59 of CA No. 141, Sections 63
and 67 require a public bidding. Sections 63 and 67 of CA No. 141 provide as follows:
"Sec. 63. Whenever it is decided that lands covered by this chapter are not needed for public purposes, the
Director of Lands shall ask the Secretary of Agriculture and Commerce (now the Secretary of Natural
Resources) for authority to dispose of the same. Upon receipt of such authority, the Director of Lands shall
give notice by public advertisement in the same manner as in the case of leases or sales of agricultural public
land, x x x.
Sec. 67. The lease or sale shall be made by oral bidding; and adjudication shall be made to the
highest bidder. x x x." (Emphasis supplied)
Thus, CA No. 141 mandates the Government to put to public auction all leases or sales of alienable or disposable
lands of the public domain.58
Like Act No. 1654 and Act No. 2874 before it, CA No. 141 did not repeal Section 5 of the Spanish Law of Waters of
1866. Private parties could still reclaim portions of the sea with government permission. However, the reclaimed land
could become private land only if classified as alienable agricultural land of the public domain open to
disposition under CA No. 141. The 1935 Constitution prohibited the alienation of all natural resources except public
agricultural lands.
The Civil Code of 1950
The Civil Code of 1950 readopted substantially the definition of property of public dominion found in the Civil Code of
1889. Articles 420 and 422 of the Civil Code of 1950 state that
"Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the
State, banks, shores, roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and are intended for some public service or
for the development of the national wealth.
x x x.
Art. 422. Property of public dominion, when no longer intended for public use or for public service, shall form
part of the patrimonial property of the State."
Again, the government must formally declare that the property of public dominion is no longer needed for public use
or public service, before the same could be classified as patrimonial property of the State. 59 In the case of government
reclaimed and marshy lands of the public domain, the declaration of their being disposable, as well as the manner of
their disposition, is governed by the applicable provisions of CA No. 141.
Like the Civil Code of 1889, the Civil Code of 1950 included as property of public dominion those properties of the
State which, without being for public use, are intended for public service or the "development of the national
wealth." Thus, government reclaimed and marshy lands of the State, even if not employed for public use or public
service, if developed to enhance the national wealth, are classified as property of public dominion.
Dispositions under the 1973 Constitution
The 1973 Constitution, which took effect on January 17, 1973, likewise adopted the Regalian doctrine. Section 8,
Article XIV of the 1973 Constitution stated that
"Sec. 8. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, wildlife, and other natural resources of the Philippines belong to the State. With
the exception of agricultural, industrial or commercial, residential, and resettlement lands of the
public domain, natural resources shall not be alienated, and no license, concession, or lease for the
exploration, development, exploitation, or utilization of any of the natural resources shall be granted for a
period exceeding twenty-five years, renewable for not more than twenty-five years, except as to water rights
for irrigation, water supply, fisheries, or industrial uses other than the development of water power, in which
cases, beneficial use may be the measure and the limit of the grant." (Emphasis supplied)

109
The 1973 Constitution prohibited the alienation of all natural resources with the exception of "agricultural, industrial or
commercial, residential, and resettlement lands of the public domain." In contrast, the 1935 Constitution barred the
alienation of all natural resources except "public agricultural lands." However, the term "public agricultural lands" in
the 1935 Constitution encompassed industrial, commercial, residential and resettlement lands of the public
domain.60 If the land of public domain were neither timber nor mineral land, it would fall under the classification of
agricultural land of the public domain. Both the 1935 and 1973 Constitutions, therefore, prohibited the alienation
of all natural resources except agricultural lands of the public domain.
The 1973 Constitution, however, limited the alienation of lands of the public domain to individuals who were citizens of
the Philippines. Private corporations, even if wholly owned by Philippine citizens, were no longer allowed to acquire
alienable lands of the public domain unlike in the 1935 Constitution. Section 11, Article XIV of the 1973 Constitution
declared that
"Sec. 11. The Batasang Pambansa, taking into account conservation, ecological, and development
requirements of the natural resources, shall determine by law the size of land of the public domain which may
be developed, held or acquired by, or leased to, any qualified individual, corporation, or association, and the
conditions therefor. No private corporation or association may hold alienable lands of the public
domain except by lease not to exceed one thousand hectares in area nor may any citizen hold such lands
by lease in excess of five hundred hectares or acquire by purchase, homestead or grant, in excess of twentyfour hectares. No private corporation or association may hold by lease, concession, license or permit, timber
or forest lands and other timber or forest resources in excess of one hundred thousand hectares. However,
such area may be increased by the Batasang Pambansa upon recommendation of the National Economic
and Development Authority." (Emphasis supplied)
Thus, under the 1973 Constitution, private corporations could hold alienable lands of the public domain only through
lease. Only individuals could now acquire alienable lands of the public domain, and private corporations became
absolutely barred from acquiring any kind of alienable land of the public domain. The constitutional ban
extended to all kinds of alienable lands of the public domain, while the statutory ban under CA No. 141 applied only to
government reclaimed, foreshore and marshy alienable lands of the public domain.
PD No. 1084 Creating the Public Estates Authority
On February 4, 1977, then President Ferdinand Marcos issued Presidential Decree No. 1084 creating PEA, a wholly
government owned and controlled corporation with a special charter. Sections 4 and 8 of PD No. 1084, vests PEA
with the following purposes and powers:
"Sec. 4. Purpose. The Authority is hereby created for the following purposes:
(a) To reclaim land, including foreshore and submerged areas, by dredging, filling or other means, or
to acquire reclaimed land;
(b) To develop, improve, acquire, administer, deal in, subdivide, dispose, lease and sell any and all kinds of
lands, buildings, estates and other forms of real property, owned, managed, controlled and/or operated by the
government;
(c) To provide for, operate or administer such service as may be necessary for the efficient, economical and
beneficial utilization of the above properties.
Sec. 5. Powers and functions of the Authority. The Authority shall, in carrying out the purposes for which it is
created, have the following powers and functions:
(a)To prescribe its by-laws.
xxx
(i) To hold lands of the public domain in excess of the area permitted to private corporations by statute.
(j) To reclaim lands and to construct work across, or otherwise, any stream, watercourse, canal, ditch, flume
x x x.
xxx
(o) To perform such acts and exercise such functions as may be necessary for the attainment of the purposes
and objectives herein specified." (Emphasis supplied)

110
PD No. 1084 authorizes PEA to reclaim both foreshore and submerged areas of the public domain. Foreshore areas
are those covered and uncovered by the ebb and flow of the tide. 61 Submerged areas are those permanently under
water regardless of the ebb and flow of the tide. 62 Foreshore and submerged areas indisputably belong to the public
domain63 and are inalienable unless reclaimed, classified as alienable lands open to disposition, and further declared
no longer needed for public service.
The ban in the 1973 Constitution on private corporations from acquiring alienable lands of the public domain did not
apply to PEA since it was then, and until today, a fully owned government corporation. The constitutional ban applied
then, as it still applies now, only to "private corporations and associations." PD No. 1084 expressly empowers PEA
"to hold lands of the public domain" even "in excess of the area permitted to private corporations by
statute." Thus, PEA can hold title to private lands, as well as title to lands of the public domain.
In order for PEA to sell its reclaimed foreshore and submerged alienable lands of the public domain, there must be
legislative authority empowering PEA to sell these lands. This legislative authority is necessary in view of Section 60
of CA No.141, which states
"Sec. 60. x x x; but the land so granted, donated or transferred to a province, municipality, or branch or
subdivision of the Government shall not be alienated, encumbered or otherwise disposed of in a manner
affecting its title, except when authorized by Congress; x x x." (Emphasis supplied)
Without such legislative authority, PEA could not sell but only lease its reclaimed foreshore and submerged alienable
lands of the public domain. Nevertheless, any legislative authority granted to PEA to sell its reclaimed alienable lands
of the public domain would be subject to the constitutional ban on private corporations from acquiring alienable lands
of the public domain. Hence, such legislative authority could only benefit private individuals.
Dispositions under the 1987 Constitution
The 1987 Constitution, like the 1935 and 1973 Constitutions before it, has adopted the Regalian doctrine. The 1987
Constitution declares that all natural resources are "owned by the State," and except for alienable agricultural lands
of the public domain, natural resources cannot be alienated. Sections 2 and 3, Article XII of the 1987 Constitution
state that
"Section 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces
of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. The exploration, development, and utilization of natural resources shall be under the full control
and supervision of the State. x x x.
Section 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and
national parks. Agricultural lands of the public domain may be further classified by law according to the uses
which they may be devoted. Alienable lands of the public domain shall be limited to agricultural lands.
Private corporations or associations may not hold such alienable lands of the public domain except
by lease, for a period not exceeding twenty-five years, renewable for not more than twenty-five years,
and not to exceed one thousand hectares in area. Citizens of the Philippines may lease not more than five
hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant.
Taking into account the requirements of conservation, ecology, and development, and subject to the
requirements of agrarian reform, the Congress shall determine, by law, the size of lands of the public domain
which may be acquired, developed, held, or leased and the conditions therefor." (Emphasis supplied)
The 1987 Constitution continues the State policy in the 1973 Constitution banning private corporations fromacquiring
any kind of alienable land of the public domain. Like the 1973 Constitution, the 1987 Constitution allows private
corporations to hold alienable lands of the public domain only through lease. As in the 1935 and 1973 Constitutions,
the general law governing the lease to private corporations of reclaimed, foreshore and marshy alienable lands of the
public domain is still CA No. 141.
The Rationale behind the Constitutional Ban
The rationale behind the constitutional ban on corporations from acquiring, except through lease, alienable lands of
the public domain is not well understood. During the deliberations of the 1986 Constitutional Commission, the
commissioners probed the rationale behind this ban, thus:
"FR. BERNAS: Mr. Vice-President, my questions have reference to page 3, line 5 which says:
`No private corporation or association may hold alienable lands of the public domain except by lease, not to
exceed one thousand hectares in area.'

111
If we recall, this provision did not exist under the 1935 Constitution, but this was introduced in the 1973
Constitution. In effect, it prohibits private corporations from acquiring alienable public lands. But it has not
been very clear in jurisprudence what the reason for this is. In some of the cases decided in 1982 and
1983, it was indicated that the purpose of this is to prevent large landholdings. Is that the intent of this
provision?
MR. VILLEGAS: I think that is the spirit of the provision.
FR. BERNAS: In existing decisions involving the Iglesia ni Cristo, there were instances where the Iglesia ni
Cristo was not allowed to acquire a mere 313-square meter land where a chapel stood because the Supreme
Court said it would be in violation of this." (Emphasis supplied)
In Ayog v. Cusi,64 the Court explained the rationale behind this constitutional ban in this way:
"Indeed, one purpose of the constitutional prohibition against purchases of public agricultural lands by private
corporations is to equitably diffuse land ownership or to encourage 'owner-cultivatorship and the economic
family-size farm' and to prevent a recurrence of cases like the instant case. Huge landholdings by
corporations or private persons had spawned social unrest."
However, if the constitutional intent is to prevent huge landholdings, the Constitution could have simply limited the
size of alienable lands of the public domain that corporations could acquire. The Constitution could have followed the
limitations on individuals, who could acquire not more than 24 hectares of alienable lands of the public domain under
the 1973 Constitution, and not more than 12 hectares under the 1987 Constitution.
If the constitutional intent is to encourage economic family-size farms, placing the land in the name of a corporation
would be more effective in preventing the break-up of farmlands. If the farmland is registered in the name of a
corporation, upon the death of the owner, his heirs would inherit shares in the corporation instead of subdivided
parcels of the farmland. This would prevent the continuing break-up of farmlands into smaller and smaller plots from
one generation to the next.
In actual practice, the constitutional ban strengthens the constitutional limitation on individuals from acquiring more
than the allowed area of alienable lands of the public domain. Without the constitutional ban, individuals who already
acquired the maximum area of alienable lands of the public domain could easily set up corporations to acquire more
alienable public lands. An individual could own as many corporations as his means would allow him. An individual
could even hide his ownership of a corporation by putting his nominees as stockholders of the corporation. The
corporation is a convenient vehicle to circumvent the constitutional limitation on acquisition by individuals of alienable
lands of the public domain.
The constitutional intent, under the 1973 and 1987 Constitutions, is to transfer ownership of only a limited area of
alienable land of the public domain to a qualified individual. This constitutional intent is safeguarded by the provision
prohibiting corporations from acquiring alienable lands of the public domain, since the vehicle to circumvent the
constitutional intent is removed. The available alienable public lands are gradually decreasing in the face of an evergrowing population. The most effective way to insure faithful adherence to this constitutional intent is to grant or sell
alienable lands of the public domain only to individuals. This, it would seem, is the practical benefit arising from the
constitutional ban.
The Amended Joint Venture Agreement
The subject matter of the Amended JVA, as stated in its second Whereas clause, consists of three properties,
namely:
1. "[T]hree partially reclaimed and substantially eroded islands along Emilio Aguinaldo Boulevard in
Paranaque and Las Pinas, Metro Manila, with a combined titled area of 1,578,441 square meters;"
2. "[A]nother area of 2,421,559 square meters contiguous to the three islands;" and
3. "[A]t AMARI's option as approved by PEA, an additional 350 hectares more or less to regularize the
configuration of the reclaimed area."65
PEA confirms that the Amended JVA involves "the development of the Freedom Islands and further reclamation of
about 250 hectares x x x," plus an option "granted to AMARI to subsequently reclaim another 350 hectares x x x." 66
In short, the Amended JVA covers a reclamation area of 750 hectares. Only 157.84 hectares of the 750-hectare
reclamation project have been reclaimed, and the rest of the 592.15 hectares are still submerged areas
forming part of Manila Bay.

112
Under the Amended JVA, AMARI will reimburse PEA the sum of P1,894,129,200.00 for PEA's "actual cost" in partially
reclaiming the Freedom Islands. AMARI will also complete, at its own expense, the reclamation of the Freedom
Islands. AMARI will further shoulder all the reclamation costs of all the other areas, totaling 592.15 hectares, still to be
reclaimed. AMARI and PEA will share, in the proportion of 70 percent and 30 percent, respectively, the total net
usable area which is defined in the Amended JVA as the total reclaimed area less 30 percent earmarked for common
areas. Title to AMARI's share in the net usable area, totaling 367.5 hectares, will be issued in the name of AMARI.
Section 5.2 (c) of the Amended JVA provides that
"x x x, PEA shall have the duty to execute without delay the necessary deed of transfer or conveyance of the
title pertaining to AMARI's Land share based on the Land Allocation Plan. PEA, when requested in writing
by AMARI, shall then cause the issuance and delivery of the proper certificates of title covering
AMARI's Land Share in the name of AMARI, x x x; provided, that if more than seventy percent (70%) of the
titled area at any given time pertains to AMARI, PEA shall deliver to AMARI only seventy percent (70%) of the
titles pertaining to AMARI, until such time when a corresponding proportionate area of additional land
pertaining to PEA has been titled." (Emphasis supplied)
Indisputably, under the Amended JVA AMARI will acquire and own a maximum of 367.5 hectares of reclaimed
land which will be titled in its name.
To implement the Amended JVA, PEA delegated to the unincorporated PEA-AMARI joint venture PEA's statutory
authority, rights and privileges to reclaim foreshore and submerged areas in Manila Bay. Section 3.2.a of the
Amended JVA states that
"PEA hereby contributes to the joint venture its rights and privileges to perform Rawland Reclamation and
Horizontal Development as well as own the Reclamation Area, thereby granting the Joint Venture the full and
exclusive right, authority and privilege to undertake the Project in accordance with the Master Development
Plan."
The Amended JVA is the product of a renegotiation of the original JVA dated April 25, 1995 and its supplemental
agreement dated August 9, 1995.
The Threshold Issue
The threshold issue is whether AMARI, a private corporation, can acquire and own under the Amended JVA 367.5
hectares of reclaimed foreshore and submerged areas in Manila Bay in view of Sections 2 and 3, Article XII of the
1987 Constitution which state that:
"Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces
of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are
owned by the State. With the exception of agricultural lands, all other natural resources shall not be
alienated. x x x.
xxx
Section 3. x x x Alienable lands of the public domain shall be limited to agricultural lands. Private
corporations or associations may not hold such alienable lands of the public domain except by lease,
x x x."(Emphasis supplied)
Classification of Reclaimed Foreshore and Submerged Areas
PEA readily concedes that lands reclaimed from foreshore or submerged areas of Manila Bay are alienable or
disposable lands of the public domain. In its Memorandum, 67 PEA admits that
"Under the Public Land Act (CA 141, as amended), reclaimed lands are classified as alienable and
disposable lands of the public domain:
'Sec. 59. The lands disposable under this title shall be classified as follows:
(a) Lands reclaimed by the government by dredging, filling, or other means;
x x x.'" (Emphasis supplied)
Likewise, the Legal Task Force68 constituted under Presidential Administrative Order No. 365 admitted in its Report
and Recommendation to then President Fidel V. Ramos, "[R]eclaimed lands are classified as alienable and
disposable lands of the public domain."69 The Legal Task Force concluded that

113
"D. Conclusion
Reclaimed lands are lands of the public domain. However, by statutory authority, the rights of ownership and
disposition over reclaimed lands have been transferred to PEA, by virtue of which PEA, as owner, may validly
convey the same to any qualified person without violating the Constitution or any statute.
The constitutional provision prohibiting private corporations from holding public land, except by lease (Sec. 3,
Art. XVII,70 1987 Constitution), does not apply to reclaimed lands whose ownership has passed on to PEA by
statutory grant."
Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of Manila Bay are part of the
"lands of the public domain, waters x x x and other natural resources" and consequently "owned by the State." As
such, foreshore and submerged areas "shall not be alienated," unless they are classified as "agricultural lands" of the
public domain. The mere reclamation of these areas by PEA does not convert these inalienable natural resources of
the State into alienable or disposable lands of the public domain. There must be a law or presidential proclamation
officially classifying these reclaimed lands as alienable or disposable and open to disposition or concession.
Moreover, these reclaimed lands cannot be classified as alienable or disposable if the law has reserved them for
some public or quasi-public use.71
Section 8 of CA No. 141 provides that "only those lands shall be declared open to disposition or concession which
have been officially delimited and classified."72 The President has the authority to classify inalienable lands of the
public domain into alienable or disposable lands of the public domain, pursuant to Section 6 of CA No. 141. In Laurel
vs. Garcia,73 the Executive Department attempted to sell the Roppongi property in Tokyo, Japan, which was acquired
by the Philippine Government for use as the Chancery of the Philippine Embassy. Although the Chancery had
transferred to another location thirteen years earlier, the Court still ruled that, under Article 422 74of the Civil Code, a
property of public dominion retains such character until formally declared otherwise. The Court ruled that
"The fact that the Roppongi site has not been used for a long time for actual Embassy service does not
automatically convert it to patrimonial property. Any such conversion happens only if the property is withdrawn
from public use (Cebu Oxygen and Acetylene Co. v. Bercilles, 66 SCRA 481 [1975]. A property continues to
be part of the public domain, not available for private appropriation or ownership 'until there is a
formal declaration on the part of the government to withdraw it from being such' (Ignacio v. Director of
Lands, 108 Phil. 335 [1960]." (Emphasis supplied)
PD No. 1085, issued on February 4, 1977, authorized the issuance of special land patents for lands reclaimed by
PEA from the foreshore or submerged areas of Manila Bay. On January 19, 1988 then President Corazon C. Aquino
issued Special Patent No. 3517 in the name of PEA for the 157.84 hectares comprising the partially reclaimed
Freedom Islands. Subsequently, on April 9, 1999 the Register of Deeds of the Municipality of Paranaque issued TCT
Nos. 7309, 7311 and 7312 in the name of PEA pursuant to Section 103 of PD No. 1529 authorizing the issuance of
certificates of title corresponding to land patents. To this day, these certificates of title are still in the name of PEA.
PD No. 1085, coupled with President Aquino's actual issuance of a special patent covering the Freedom Islands, is
equivalent to an official proclamation classifying the Freedom Islands as alienable or disposable lands of the public
domain. PD No. 1085 and President Aquino's issuance of a land patent also constitute a declaration that the Freedom
Islands are no longer needed for public service. The Freedom Islands are thus alienable or disposable lands of
the public domain, open to disposition or concession to qualified parties.
At the time then President Aquino issued Special Patent No. 3517, PEA had already reclaimed the Freedom Islands
although subsequently there were partial erosions on some areas. The government had also completed the
necessary surveys on these islands. Thus, the Freedom Islands were no longer part of Manila Bay but part of the land
mass. Section 3, Article XII of the 1987 Constitution classifies lands of the public domain into "agricultural, forest or
timber, mineral lands, and national parks." Being neither timber, mineral, nor national park lands, the reclaimed
Freedom Islands necessarily fall under the classification of agricultural lands of the public domain. Under the 1987
Constitution, agricultural lands of the public domain are the only natural resources that the State may alienate to
qualified private parties. All other natural resources, such as the seas or bays, are "waters x x x owned by the State"
forming part of the public domain, and are inalienable pursuant to Section 2, Article XII of the 1987 Constitution.
AMARI claims that the Freedom Islands are private lands because CDCP, then a private corporation, reclaimed the
islands under a contract dated November 20, 1973 with the Commissioner of Public Highways. AMARI, citing Article 5
of the Spanish Law of Waters of 1866, argues that "if the ownership of reclaimed lands may be given to the party
constructing the works, then it cannot be said that reclaimed lands are lands of the public domain which the State
may not alienate."75 Article 5 of the Spanish Law of Waters reads as follows:
"Article 5. Lands reclaimed from the sea in consequence of works constructed by the State, or by the
provinces, pueblos or private persons, with proper permission, shall become the property of the party
constructing such works, unless otherwise provided by the terms of the grant of authority." (Emphasis
supplied)

114
Under Article 5 of the Spanish Law of Waters of 1866, private parties could reclaim from the sea only with "proper
permission" from the State. Private parties could own the reclaimed land only if not "otherwise provided by the terms
of the grant of authority." This clearly meant that no one could reclaim from the sea without permission from the State
because the sea is property of public dominion. It also meant that the State could grant or withhold ownership of the
reclaimed land because any reclaimed land, like the sea from which it emerged, belonged to the State. Thus, a
private person reclaiming from the sea without permission from the State could not acquire ownership of the
reclaimed land which would remain property of public dominion like the sea it replaced. 76 Article 5 of the Spanish Law
of Waters of 1866 adopted the time-honored principle of land ownership that "all lands that were not acquired from the
government, either by purchase or by grant, belong to the public domain." 77
Article 5 of the Spanish Law of Waters must be read together with laws subsequently enacted on the disposition of
public lands. In particular, CA No. 141 requires that lands of the public domain must first be classified as alienable or
disposable before the government can alienate them. These lands must not be reserved for public or quasi-public
purposes.78 Moreover, the contract between CDCP and the government was executed after the effectivity of the 1973
Constitution which barred private corporations from acquiring any kind of alienable land of the public domain. This
contract could not have converted the Freedom Islands into private lands of a private corporation.
Presidential Decree No. 3-A, issued on January 11, 1973, revoked all laws authorizing the reclamation of areas under
water and revested solely in the National Government the power to reclaim lands. Section 1 of PD No. 3-A declared
that
"The provisions of any law to the contrary notwithstanding, the reclamation of areas under water,
whether foreshore or inland, shall be limited to the National Government or any person authorized by it
under a proper contract. (Emphasis supplied)
x x x."
PD No. 3-A repealed Section 5 of the Spanish Law of Waters of 1866 because reclamation of areas under water
could now be undertaken only by the National Government or by a person contracted by the National Government.
Private parties may reclaim from the sea only under a contract with the National Government, and no longer by grant
or permission as provided in Section 5 of the Spanish Law of Waters of 1866.
Executive Order No. 525, issued on February 14, 1979, designated PEA as the National Government's implementing
arm to undertake "all reclamation projects of the government," which "shall be undertaken by the PEA or through a
proper contract executed by it with any person or entity." Under such contract, a private party receives
compensation for reclamation services rendered to PEA. Payment to the contractor may be in cash, or in kind
consisting of portions of the reclaimed land, subject to the constitutional ban on private corporations from acquiring
alienable lands of the public domain. The reclaimed land can be used as payment in kind only if the reclaimed land is
first classified as alienable or disposable land open to disposition, and then declared no longer needed for public
service.
The Amended JVA covers not only the Freedom Islands, but also an additional 592.15 hectares which are still
submerged and forming part of Manila Bay. There is no legislative or Presidential act classifying these
submerged areas as alienable or disposable lands of the public domain open to disposition. These submerged
areas are not covered by any patent or certificate of title. There can be no dispute that these submerged areas form
part of the public domain, and in their present state are inalienable and outside the commerce of man. Until
reclaimed from the sea, these submerged areas are, under the Constitution, "waters x x x owned by the State,"
forming part of the public domain and consequently inalienable. Only when actually reclaimed from the sea can these
submerged areas be classified as public agricultural lands, which under the Constitution are the only natural
resources that the State may alienate. Once reclaimed and transformed into public agricultural lands, the government
may then officially classify these lands as alienable or disposable lands open to disposition. Thereafter, the
government may declare these lands no longer needed for public service. Only then can these reclaimed lands be
considered alienable or disposable lands of the public domain and within the commerce of man.
The classification of PEA's reclaimed foreshore and submerged lands into alienable or disposable lands open to
disposition is necessary because PEA is tasked under its charter to undertake public services that require the use of
lands of the public domain. Under Section 5 of PD No. 1084, the functions of PEA include the following: "[T]o own or
operate railroads, tramways and other kinds of land transportation, x x x; [T]o construct, maintain and operate such
systems of sanitary sewers as may be necessary; [T]o construct, maintain and operate such storm drains as may be
necessary." PEA is empowered to issue "rules and regulations as may be necessary for the proper use by private
parties of any or all of the highways, roads, utilities, buildings and/or any of its properties and to impose or
collect fees or tolls for their use." Thus, part of the reclaimed foreshore and submerged lands held by the PEA would
actually be needed for public use or service since many of the functions imposed on PEA by its charter constitute
essential public services.
Moreover, Section 1 of Executive Order No. 525 provides that PEA "shall be primarily responsible for integrating,
directing, and coordinating all reclamation projects for and on behalf of the National Government." The same section

115
also states that "[A]ll reclamation projects shall be approved by the President upon recommendation of the PEA, and
shall be undertaken by the PEA or through a proper contract executed by it with any person or entity; x x x." Thus,
under EO No. 525, in relation to PD No. 3-A and PD No.1084, PEA became the primary implementing agency of the
National Government to reclaim foreshore and submerged lands of the public domain. EO No. 525 recognized PEA
as the government entity "to undertake the reclamation of lands and ensure their maximum utilization in promoting
public welfare and interests."79 Since large portions of these reclaimed lands would obviously be needed for public
service, there must be a formal declaration segregating reclaimed lands no longer needed for public service from
those still needed for public service.1wphi1.nt
Section 3 of EO No. 525, by declaring that all lands reclaimed by PEA "shall belong to or be owned by the PEA,"
could not automatically operate to classify inalienable lands into alienable or disposable lands of the public domain.
Otherwise, reclaimed foreshore and submerged lands of the public domain would automatically become alienable
once reclaimed by PEA, whether or not classified as alienable or disposable.
The Revised Administrative Code of 1987, a later law than either PD No. 1084 or EO No. 525, vests in the
Department of Environment and Natural Resources ("DENR" for brevity) the following powers and functions:
"Sec. 4. Powers and Functions. The Department shall:
(1) x x x
xxx
(4) Exercise supervision and control over forest lands, alienable and disposable public lands, mineral
resources and, in the process of exercising such control, impose appropriate taxes, fees, charges, rentals and
any such form of levy and collect such revenues for the exploration, development, utilization or gathering of
such resources;
xxx
(14) Promulgate rules, regulations and guidelines on the issuance of licenses, permits, concessions,
lease agreements and such other privileges concerning the development, exploration and utilization
of the country's marine, freshwater, and brackish water and over all aquatic resources of the country
and shall continue to oversee, supervise and police our natural resources; cancel or cause to cancel
such privileges upon failure, non-compliance or violations of any regulation, order, and for all other causes
which are in furtherance of the conservation of natural resources and supportive of the national interest;
(15) Exercise exclusive jurisdiction on the management and disposition of all lands of the public
domain and serve as the sole agency responsible for classification, sub-classification, surveying and
titling of lands in consultation with appropriate agencies." 80 (Emphasis supplied)
As manager, conservator and overseer of the natural resources of the State, DENR exercises "supervision and
control over alienable and disposable public lands." DENR also exercises "exclusive jurisdiction on the management
and disposition of all lands of the public domain." Thus, DENR decides whether areas under water, like foreshore or
submerged areas of Manila Bay, should be reclaimed or not. This means that PEA needs authorization from DENR
before PEA can undertake reclamation projects in Manila Bay, or in any part of the country.
DENR also exercises exclusive jurisdiction over the disposition of all lands of the public domain. Hence, DENR
decides whether reclaimed lands of PEA should be classified as alienable under Sections 6 81 and 782 of CA No. 141.
Once DENR decides that the reclaimed lands should be so classified, it then recommends to the President the
issuance of a proclamation classifying the lands as alienable or disposable lands of the public domain open to
disposition. We note that then DENR Secretary Fulgencio S. Factoran, Jr. countersigned Special Patent No. 3517 in
compliance with the Revised Administrative Code and Sections 6 and 7 of CA No. 141.
In short, DENR is vested with the power to authorize the reclamation of areas under water, while PEA is vested with
the power to undertake the physical reclamation of areas under water, whether directly or through private contractors.
DENR is also empowered to classify lands of the public domain into alienable or disposable lands subject to the
approval of the President. On the other hand, PEA is tasked to develop, sell or lease the reclaimed alienable lands of
the public domain.
Clearly, the mere physical act of reclamation by PEA of foreshore or submerged areas does not make the reclaimed
lands alienable or disposable lands of the public domain, much less patrimonial lands of PEA. Likewise, the mere
transfer by the National Government of lands of the public domain to PEA does not make the lands alienable or
disposable lands of the public domain, much less patrimonial lands of PEA.

116
Absent two official acts a classification that these lands are alienable or disposable and open to disposition and a
declaration that these lands are not needed for public service, lands reclaimed by PEA remain inalienable lands of the
public domain. Only such an official classification and formal declaration can convert reclaimed lands into alienable or
disposable lands of the public domain, open to disposition under the Constitution, Title I and Title III 83of CA No. 141
and other applicable laws.84
PEA's Authority to Sell Reclaimed Lands
PEA, like the Legal Task Force, argues that as alienable or disposable lands of the public domain, the reclaimed
lands shall be disposed of in accordance with CA No. 141, the Public Land Act. PEA, citing Section 60 of CA No. 141,
admits that reclaimed lands transferred to a branch or subdivision of the government "shall not be alienated,
encumbered, or otherwise disposed of in a manner affecting its title, except when authorized by Congress: x x
x."85 (Emphasis by PEA)
In Laurel vs. Garcia,86 the Court cited Section 48 of the Revised Administrative Code of 1987, which states that
"Sec. 48. Official Authorized to Convey Real Property. Whenever real property of the Government is
authorized by law to be conveyed, the deed of conveyance shall be executed in behalf of the government
by the following: x x x."
Thus, the Court concluded that a law is needed to convey any real property belonging to the Government. The Court
declared that "It is not for the President to convey real property of the government on his or her own sole will. Any such
conveyance must be authorized and approved by a law enacted by the Congress. It requires executive
and legislative concurrence." (Emphasis supplied)
PEA contends that PD No. 1085 and EO No. 525 constitute the legislative authority allowing PEA to sell its reclaimed
lands. PD No. 1085, issued on February 4, 1977, provides that
"The land reclaimed in the foreshore and offshore area of Manila Bay pursuant to the contract for the
reclamation and construction of the Manila-Cavite Coastal Road Project between the Republic of the
Philippines and the Construction and Development Corporation of the Philippines dated November 20, 1973
and/or any other contract or reclamation covering the same area is hereby transferred, conveyed and
assigned to the ownership and administration of the Public Estates Authority established pursuant to
PD No. 1084; Provided, however, That the rights and interests of the Construction and Development
Corporation of the Philippines pursuant to the aforesaid contract shall be recognized and respected.
Henceforth, the Public Estates Authority shall exercise the rights and assume the obligations of the Republic
of the Philippines (Department of Public Highways) arising from, or incident to, the aforesaid contract between
the Republic of the Philippines and the Construction and Development Corporation of the Philippines.
In consideration of the foregoing transfer and assignment, the Public Estates Authority shall issue in favor of
the Republic of the Philippines the corresponding shares of stock in said entity with an issued value of said
shares of stock (which) shall be deemed fully paid and non-assessable.
The Secretary of Public Highways and the General Manager of the Public Estates Authority shall execute
such contracts or agreements, including appropriate agreements with the Construction and Development
Corporation of the Philippines, as may be necessary to implement the above.
Special land patent/patents shall be issued by the Secretary of Natural Resources in favor of the
Public Estates Authority without prejudice to the subsequent transfer to the contractor or his
assignees of such portion or portions of the land reclaimed or to be reclaimed as provided for in the
above-mentioned contract. On the basis of such patents, the Land Registration Commission shall
issue the corresponding certificate of title." (Emphasis supplied)
On the other hand, Section 3 of EO No. 525, issued on February 14, 1979, provides that "Sec. 3. All lands reclaimed by PEA shall belong to or be owned by the PEA which shall be responsible
for its administration, development, utilization or disposition in accordance with the provisions of Presidential
Decree No. 1084. Any and all income that the PEA may derive from the sale, lease or use of reclaimed lands
shall be used in accordance with the provisions of Presidential Decree No. 1084."
There is no express authority under either PD No. 1085 or EO No. 525 for PEA to sell its reclaimed lands. PD No.
1085 merely transferred "ownership and administration" of lands reclaimed from Manila Bay to PEA, while EO No.
525 declared that lands reclaimed by PEA "shall belong to or be owned by PEA." EO No. 525 expressly states that

117
PEA should dispose of its reclaimed lands "in accordance with the provisions of Presidential Decree No. 1084," the
charter of PEA.
PEA's charter, however, expressly tasks PEA "to develop, improve, acquire, administer, deal in, subdivide, dispose,
lease and sell any and all kinds of lands x x x owned, managed, controlled and/or operated by the
government."87 (Emphasis supplied) There is, therefore, legislative authority granted to PEA to sell its lands,
whether patrimonial or alienable lands of the public domain. PEA may sell to private parties its patrimonial
properties in accordance with the PEA charter free from constitutional limitations. The constitutional ban on private
corporations from acquiring alienable lands of the public domain does not apply to the sale of PEA's patrimonial
lands.
PEA may also sell its alienable or disposable lands of the public domain to private individuals since, with the
legislative authority, there is no longer any statutory prohibition against such sales and the constitutional ban does not
apply to individuals. PEA, however, cannot sell any of its alienable or disposable lands of the public domain to private
corporations since Section 3, Article XII of the 1987 Constitution expressly prohibits such sales. The legislative
authority benefits only individuals. Private corporations remain barred from acquiring any kind of alienable land of the
public domain, including government reclaimed lands.
The provision in PD No. 1085 stating that portions of the reclaimed lands could be transferred by PEA to the
"contractor or his assignees" (Emphasis supplied) would not apply to private corporations but only to individuals
because of the constitutional ban. Otherwise, the provisions of PD No. 1085 would violate both the 1973 and 1987
Constitutions.
The requirement of public auction in the sale of reclaimed lands
Assuming the reclaimed lands of PEA are classified as alienable or disposable lands open to disposition, and further
declared no longer needed for public service, PEA would have to conduct a public bidding in selling or leasing these
lands. PEA must observe the provisions of Sections 63 and 67 of CA No. 141 requiring public auction, in the absence
of a law exempting PEA from holding a public auction. 88 Special Patent No. 3517 expressly states that the patent is
issued by authority of the Constitution and PD No. 1084, "supplemented by Commonwealth Act No. 141, as
amended." This is an acknowledgment that the provisions of CA No. 141 apply to the disposition of reclaimed
alienable lands of the public domain unless otherwise provided by law. Executive Order No. 654, 89 which authorizes
PEA "to determine the kind and manner of payment for the transfer" of its assets and properties, does not exempt
PEA from the requirement of public auction. EO No. 654 merely authorizes PEA to decide the mode of payment,
whether in kind and in installment, but does not authorize PEA to dispense with public auction.
Moreover, under Section 79 of PD No. 1445, otherwise known as the Government Auditing Code, the government is
required to sell valuable government property through public bidding. Section 79 of PD No. 1445 mandates that
"Section 79. When government property has become unserviceable for any cause, or is no longer needed,
it shall, upon application of the officer accountable therefor, be inspected by the head of the agency or his duly
authorized representative in the presence of the auditor concerned and, if found to be valueless or
unsaleable, it may be destroyed in their presence. If found to be valuable, it may be sold at public auction
to the highest bidder under the supervision of the proper committee on award or similar body in the
presence of the auditor concerned or other authorized representative of the Commission, after advertising
by printed notice in the Official Gazette, or for not less than three consecutive days in any newspaper
of general circulation, or where the value of the property does not warrant the expense of publication, by
notices posted for a like period in at least three public places in the locality where the property is to be sold. In
the event that the public auction fails, the property may be sold at a private sale at such price as may
be fixed by the same committee or body concerned and approved by the Commission."
It is only when the public auction fails that a negotiated sale is allowed, in which case the Commission on Audit must
approve the selling price.90 The Commission on Audit implements Section 79 of the Government Auditing Code
through Circular No. 89-29691 dated January 27, 1989. This circular emphasizes that government assets must be
disposed of only through public auction, and a negotiated sale can be resorted to only in case of "failure of public
auction."
At the public auction sale, only Philippine citizens are qualified to bid for PEA's reclaimed foreshore and submerged
alienable lands of the public domain. Private corporations are barred from bidding at the auction sale of any kind of
alienable land of the public domain.
PEA originally scheduled a public bidding for the Freedom Islands on December 10, 1991. PEA imposed a condition
that the winning bidder should reclaim another 250 hectares of submerged areas to regularize the shape of the
Freedom Islands, under a 60-40 sharing of the additional reclaimed areas in favor of the winning bidder.92No one,
however, submitted a bid. On December 23, 1994, the Government Corporate Counsel advised PEA it could sell the
Freedom Islands through negotiation, without need of another public bidding, because of the failure of the public
bidding on December 10, 1991. 93

118
However, the original JVA dated April 25, 1995 covered not only the Freedom Islands and the additional 250 hectares
still to be reclaimed, it also granted an option to AMARI to reclaim another 350 hectares. The original JVA, a
negotiated contract, enlarged the reclamation area to 750 hectares.94 The failure of public bidding on December 10,
1991, involving only 407.84 hectares,95 is not a valid justification for a negotiated sale of 750 hectares, almost double
the area publicly auctioned. Besides, the failure of public bidding happened on December 10, 1991, more than three
years before the signing of the original JVA on April 25, 1995. The economic situation in the country had greatly
improved during the intervening period.
Reclamation under the BOT Law and the Local Government Code
The constitutional prohibition in Section 3, Article XII of the 1987 Constitution is absolute and clear: "Private
corporations or associations may not hold such alienable lands of the public domain except by lease, x x x." Even
Republic Act No. 6957 ("BOT Law," for brevity), cited by PEA and AMARI as legislative authority to sell reclaimed
lands to private parties, recognizes the constitutional ban. Section 6 of RA No. 6957 states
"Sec. 6. Repayment Scheme. - For the financing, construction, operation and maintenance of any
infrastructure projects undertaken through the build-operate-and-transfer arrangement or any of its variations
pursuant to the provisions of this Act, the project proponent x x x may likewise be repaid in the form of a share
in the revenue of the project or other non-monetary payments, such as, but not limited to, the grant of a
portion or percentage of the reclaimed land, subject to the constitutional requirements with respect to
the ownership of the land: x x x." (Emphasis supplied)
A private corporation, even one that undertakes the physical reclamation of a government BOT project, cannot
acquire reclaimed alienable lands of the public domain in view of the constitutional ban.
Section 302 of the Local Government Code, also mentioned by PEA and AMARI, authorizes local governments in
land reclamation projects to pay the contractor or developer in kind consisting of a percentage of the reclaimed land,
to wit:
"Section 302. Financing, Construction, Maintenance, Operation, and Management of Infrastructure Projects
by the Private Sector. x x x
xxx
In case of land reclamation or construction of industrial estates, the repayment plan may consist of the grant
of a portion or percentage of the reclaimed land or the industrial estate constructed."
Although Section 302 of the Local Government Code does not contain a proviso similar to that of the BOT Law, the
constitutional restrictions on land ownership automatically apply even though not expressly mentioned in the Local
Government Code.
Thus, under either the BOT Law or the Local Government Code, the contractor or developer, if a corporate entity, can
only be paid with leaseholds on portions of the reclaimed land. If the contractor or developer is an individual, portions
of the reclaimed land, not exceeding 12 hectares 96 of non-agricultural lands, may be conveyed to him in ownership in
view of the legislative authority allowing such conveyance. This is the only way these provisions of the BOT Law and
the Local Government Code can avoid a direct collision with Section 3, Article XII of the 1987 Constitution.
Registration of lands of the public domain
Finally, PEA theorizes that the "act of conveying the ownership of the reclaimed lands to public respondent PEA
transformed such lands of the public domain to private lands." This theory is echoed by AMARI which maintains that
the "issuance of the special patent leading to the eventual issuance of title takes the subject land away from the land
of public domain and converts the property into patrimonial or private property." In short, PEA and AMARI contend
that with the issuance of Special Patent No. 3517 and the corresponding certificates of titles, the 157.84 hectares
comprising the Freedom Islands have become private lands of PEA. In support of their theory, PEA and AMARI cite
the following rulings of the Court:
1. Sumail v. Judge of CFI of Cotabato,97 where the Court held
"Once the patent was granted and the corresponding certificate of title was issued, the land ceased to be part
of the public domain and became private property over which the Director of Lands has neither control nor
jurisdiction."
2. Lee Hong Hok v. David,98 where the Court declared -

119
"After the registration and issuance of the certificate and duplicate certificate of title based on a public land
patent, the land covered thereby automatically comes under the operation of Republic Act 496 subject to all
the safeguards provided therein."3. Heirs of Gregorio Tengco v. Heirs of Jose Aliwalas,99 where the Court
ruled "While the Director of Lands has the power to review homestead patents, he may do so only so long as the
land remains part of the public domain and continues to be under his exclusive control; but once the patent is
registered and a certificate of title is issued, the land ceases to be part of the public domain and becomes
private property over which the Director of Lands has neither control nor jurisdiction."
4. Manalo v. Intermediate Appellate Court,100 where the Court held
"When the lots in dispute were certified as disposable on May 19, 1971, and free patents were issued
covering the same in favor of the private respondents, the said lots ceased to be part of the public domain
and, therefore, the Director of Lands lost jurisdiction over the same."
5.Republic v. Court of Appeals,101 where the Court stated
"Proclamation No. 350, dated October 9, 1956, of President Magsaysay legally effected a land grant to the
Mindanao Medical Center, Bureau of Medical Services, Department of Health, of the whole lot, validly
sufficient for initial registration under the Land Registration Act. Such land grant is constitutive of a 'fee simple'
title or absolute title in favor of petitioner Mindanao Medical Center. Thus, Section 122 of the Act, which
governs the registration of grants or patents involving public lands, provides that 'Whenever public lands in the
Philippine Islands belonging to the Government of the United States or to the Government of the Philippines
are alienated, granted or conveyed to persons or to public or private corporations, the same shall be brought
forthwith under the operation of this Act (Land Registration Act, Act 496) and shall become registered lands.'"
The first four cases cited involve petitions to cancel the land patents and the corresponding certificates of titlesissued
to private parties. These four cases uniformly hold that the Director of Lands has no jurisdiction over private lands or
that upon issuance of the certificate of title the land automatically comes under the Torrens System. The fifth case
cited involves the registration under the Torrens System of a 12.8-hectare public land granted by the National
Government to Mindanao Medical Center, a government unit under the Department of Health. The National
Government transferred the 12.8-hectare public land to serve as the site for the hospital buildings and other facilities
of Mindanao Medical Center, which performed a public service. The Court affirmed the registration of the 12.8-hectare
public land in the name of Mindanao Medical Center under Section 122 of Act No. 496. This fifth case is an example
of a public land being registered under Act No. 496 without the land losing its character as a property of public
dominion.
In the instant case, the only patent and certificates of title issued are those in the name of PEA, a wholly government
owned corporation performing public as well as proprietary functions. No patent or certificate of title has been issued
to any private party. No one is asking the Director of Lands to cancel PEA's patent or certificates of title. In fact, the
thrust of the instant petition is that PEA's certificates of title should remain with PEA, and the land covered by these
certificates, being alienable lands of the public domain, should not be sold to a private corporation.
Registration of land under Act No. 496 or PD No. 1529 does not vest in the registrant private or public ownership of
the land. Registration is not a mode of acquiring ownership but is merely evidence of ownership previously conferred
by any of the recognized modes of acquiring ownership. Registration does not give the registrant a better right than
what the registrant had prior to the registration. 102 The registration of lands of the public domain under the Torrens
system, by itself, cannot convert public lands into private lands. 103
Jurisprudence holding that upon the grant of the patent or issuance of the certificate of title the alienable land of the
public domain automatically becomes private land cannot apply to government units and entities like PEA. The
transfer of the Freedom Islands to PEA was made subject to the provisions of CA No. 141 as expressly stated in
Special Patent No. 3517 issued by then President Aquino, to wit:
"NOW, THEREFORE, KNOW YE, that by authority of the Constitution of the Philippines and in conformity with
the provisions of Presidential Decree No. 1084, supplemented by Commonwealth Act No. 141, as
amended, there are hereby granted and conveyed unto the Public Estates Authority the aforesaid tracts of
land containing a total area of one million nine hundred fifteen thousand eight hundred ninety four (1,915,894)
square meters; the technical description of which are hereto attached and made an integral part hereof."
(Emphasis supplied)
Thus, the provisions of CA No. 141 apply to the Freedom Islands on matters not covered by PD No. 1084. Section 60
of CA No. 141 prohibits, "except when authorized by Congress," the sale of alienable lands of the public domain that
are transferred to government units or entities. Section 60 of CA No. 141 constitutes, under Section 44 of PD No.
1529, a "statutory lien affecting title" of the registered land even if not annotated on the certificate of title. 104Alienable
lands of the public domain held by government entities under Section 60 of CA No. 141 remain public lands because

120
they cannot be alienated or encumbered unless Congress passes a law authorizing their disposition. Congress,
however, cannot authorize the sale to private corporations of reclaimed alienable lands of the public domain because
of the constitutional ban. Only individuals can benefit from such law.
The grant of legislative authority to sell public lands in accordance with Section 60 of CA No. 141 does not
automatically convert alienable lands of the public domain into private or patrimonial lands. The alienable lands of the
public domain must be transferred to qualified private parties, or to government entities not tasked to dispose of public
lands, before these lands can become private or patrimonial lands. Otherwise, the constitutional ban will become
illusory if Congress can declare lands of the public domain as private or patrimonial lands in the hands of a
government agency tasked to dispose of public lands. This will allow private corporations to acquire directly from
government agencies limitless areas of lands which, prior to such law, are concededly public lands.
Under EO No. 525, PEA became the central implementing agency of the National Government to reclaim foreshore
and submerged areas of the public domain. Thus, EO No. 525 declares that
"EXECUTIVE ORDER NO. 525
Designating the Public Estates Authority as the Agency Primarily Responsible for all Reclamation Projects
Whereas, there are several reclamation projects which are ongoing or being proposed to be undertaken in
various parts of the country which need to be evaluated for consistency with national programs;
Whereas, there is a need to give further institutional support to the Government's declared policy to provide
for a coordinated, economical and efficient reclamation of lands;
Whereas, Presidential Decree No. 3-A requires that all reclamation of areas shall be limited to the National
Government or any person authorized by it under proper contract;
Whereas, a central authority is needed to act on behalf of the National Government which shall ensure
a coordinated and integrated approach in the reclamation of lands;
Whereas, Presidential Decree No. 1084 creates the Public Estates Authority as a government
corporation to undertake reclamation of lands and ensure their maximum utilization in promoting
public welfare and interests; and
Whereas, Presidential Decree No. 1416 provides the President with continuing authority to reorganize the
national government including the transfer, abolition, or merger of functions and offices.
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution and pursuant to Presidential Decree No. 1416, do hereby order and direct
the following:
Section 1. The Public Estates Authority (PEA) shall be primarily responsible for integrating, directing,
and coordinating all reclamation projects for and on behalf of the National Government. All reclamation
projects shall be approved by the President upon recommendation of the PEA, and shall be undertaken by
the PEA or through a proper contract executed by it with any person or entity; Provided, that, reclamation
projects of any national government agency or entity authorized under its charter shall be undertaken in
consultation with the PEA upon approval of the President.
x x x ."
As the central implementing agency tasked to undertake reclamation projects nationwide, with authority to sell
reclaimed lands, PEA took the place of DENR as the government agency charged with leasing or selling reclaimed
lands of the public domain. The reclaimed lands being leased or sold by PEA are not private lands, in the same
manner that DENR, when it disposes of other alienable lands, does not dispose of private lands but alienable lands of
the public domain. Only when qualified private parties acquire these lands will the lands become private lands. In the
hands of the government agency tasked and authorized to dispose of alienable of disposable lands of the
public domain, these lands are still public, not private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain" as well as "any and
all kinds of lands." PEA can hold both lands of the public domain and private lands. Thus, the mere fact that alienable
lands of the public domain like the Freedom Islands are transferred to PEA and issued land patents or certificates of
title in PEA's name does not automatically make such lands private.
To allow vast areas of reclaimed lands of the public domain to be transferred to PEA as private lands will sanction a
gross violation of the constitutional ban on private corporations from acquiring any kind of alienable land of the public

121
domain. PEA will simply turn around, as PEA has now done under the Amended JVA, and transfer several
hundreds of hectares of these reclaimed and still to be reclaimed lands to a single private corporation in only one
transaction. This scheme will effectively nullify the constitutional ban in Section 3, Article XII of the 1987 Constitution
which was intended to diffuse equitably the ownership of alienable lands of the public domain among Filipinos, now
numbering over 80 million strong.
This scheme, if allowed, can even be applied to alienable agricultural lands of the public domain since PEA can
"acquire x x x any and all kinds of lands." This will open the floodgates to corporations and even individuals acquiring
hundreds of hectares of alienable lands of the public domain under the guise that in the hands of PEA these lands are
private lands. This will result in corporations amassing huge landholdings never before seen in this country - creating
the very evil that the constitutional ban was designed to prevent. This will completely reverse the clear direction of
constitutional development in this country. The 1935 Constitution allowed private corporations to acquire not more
than 1,024 hectares of public lands.105 The 1973 Constitution prohibited private corporations from acquiring any kind
of public land, and the 1987 Constitution has unequivocally reiterated this prohibition.
The contention of PEA and AMARI that public lands, once registered under Act No. 496 or PD No. 1529, automatically
become private lands is contrary to existing laws. Several laws authorize lands of the public domain to be registered
under the Torrens System or Act No. 496, now PD No. 1529, without losing their character as public lands. Section
122 of Act No. 496, and Section 103 of PD No. 1529, respectively, provide as follows:
Act No. 496
"Sec. 122. Whenever public lands in the Philippine Islands belonging to the x x x Government of the Philippine
Islands are alienated, granted, or conveyed to persons or the public or private corporations, the same shall
be brought forthwith under the operation of this Act and shall become registered lands."
PD No. 1529
"Sec. 103. Certificate of Title to Patents. Whenever public land is by the Government alienated, granted or
conveyed to any person, the same shall be brought forthwith under the operation of this Decree." (Emphasis
supplied)
Based on its legislative history, the phrase "conveyed to any person" in Section 103 of PD No. 1529 includes
conveyances of public lands to public corporations.
Alienable lands of the public domain "granted, donated, or transferred to a province, municipality, or branch or
subdivision of the Government," as provided in Section 60 of CA No. 141, may be registered under the Torrens
System pursuant to Section 103 of PD No. 1529. Such registration, however, is expressly subject to the condition in
Section 60 of CA No. 141 that the land "shall not be alienated, encumbered or otherwise disposed of in a manner
affecting its title, except when authorized by Congress." This provision refers to government reclaimed, foreshore
and marshy lands of the public domain that have been titled but still cannot be alienated or encumbered unless
expressly authorized by Congress. The need for legislative authority prevents the registered land of the public domain
from becoming private land that can be disposed of to qualified private parties.
The Revised Administrative Code of 1987 also recognizes that lands of the public domain may be registered under
the Torrens System. Section 48, Chapter 12, Book I of the Code states
"Sec. 48. Official Authorized to Convey Real Property. Whenever real property of the Government is
authorized by law to be conveyed, the deed of conveyance shall be executed in behalf of the government by
the following:
(1) x x x
(2) For property belonging to the Republic of the Philippines, but titled in the name of any political
subdivision or of any corporate agency or instrumentality, by the executive head of the agency or
instrumentality." (Emphasis supplied)
Thus, private property purchased by the National Government for expansion of a public wharf may be titled in the
name of a government corporation regulating port operations in the country. Private property purchased by the
National Government for expansion of an airport may also be titled in the name of the government agency tasked to
administer the airport. Private property donated to a municipality for use as a town plaza or public school site may
likewise be titled in the name of the municipality.106 All these properties become properties of the public domain, and if
already registered under Act No. 496 or PD No. 1529, remain registered land. There is no requirement or provision in
any existing law for the de-registration of land from the Torrens System.

122
Private lands taken by the Government for public use under its power of eminent domain become unquestionably part
of the public domain. Nevertheless, Section 85 of PD No. 1529 authorizes the Register of Deeds to issue in the name
of the National Government new certificates of title covering such expropriated lands. Section 85 of PD No. 1529
states
"Sec. 85. Land taken by eminent domain. Whenever any registered land, or interest therein, is expropriated or
taken by eminent domain, the National Government, province, city or municipality, or any other agency or
instrumentality exercising such right shall file for registration in the proper Registry a certified copy of the
judgment which shall state definitely by an adequate description, the particular property or interest
expropriated, the number of the certificate of title, and the nature of the public use. A memorandum of the right
or interest taken shall be made on each certificate of title by the Register of Deeds, and where the fee simple
is taken, a new certificate shall be issued in favor of the National Government, province, city,
municipality, or any other agency or instrumentality exercising such right for the land so taken. The legal
expenses incident to the memorandum of registration or issuance of a new certificate of title shall be for the
account of the authority taking the land or interest therein." (Emphasis supplied)
Consequently, lands registered under Act No. 496 or PD No. 1529 are not exclusively private or patrimonial lands.
Lands of the public domain may also be registered pursuant to existing laws.
AMARI makes a parting shot that the Amended JVA is not a sale to AMARI of the Freedom Islands or of the lands to
be reclaimed from submerged areas of Manila Bay. In the words of AMARI, the Amended JVA "is not a sale but a joint
venture with a stipulation for reimbursement of the original cost incurred by PEA for the earlier reclamation and
construction works performed by the CDCP under its 1973 contract with the Republic." Whether the Amended JVA is
a sale or a joint venture, the fact remains that the Amended JVA requires PEA to "cause the issuance and delivery of
the certificates of title conveying AMARI's Land Share in the name of AMARI." 107
This stipulation still contravenes Section 3, Article XII of the 1987 Constitution which provides that private corporations
"shall not hold such alienable lands of the public domain except by lease." The transfer of title and ownership to
AMARI clearly means that AMARI will "hold" the reclaimed lands other than by lease. The transfer of title and
ownership is a "disposition" of the reclaimed lands, a transaction considered a sale or alienation under CA No.
141,108 the Government Auditing Code,109 and Section 3, Article XII of the 1987 Constitution.
The Regalian doctrine is deeply implanted in our legal system. Foreshore and submerged areas form part of the
public domain and are inalienable. Lands reclaimed from foreshore and submerged areas also form part of the public
domain and are also inalienable, unless converted pursuant to law into alienable or disposable lands of the public
domain. Historically, lands reclaimed by the government are sui generis, not available for sale to private parties
unlike other alienable public lands. Reclaimed lands retain their inherent potential as areas for public use or public
service. Alienable lands of the public domain, increasingly becoming scarce natural resources, are to be distributed
equitably among our ever-growing population. To insure such equitable distribution, the 1973 and 1987 Constitutions
have barred private corporations from acquiring any kind of alienable land of the public domain. Those who attempt to
dispose of inalienable natural resources of the State, or seek to circumvent the constitutional ban on alienation of
lands of the public domain to private corporations, do so at their own risk.
We can now summarize our conclusions as follows:
1. The 157.84 hectares of reclaimed lands comprising the Freedom Islands, now covered by certificates of
title in the name of PEA, are alienable lands of the public domain. PEA may lease these lands to private
corporations but may not sell or transfer ownership of these lands to private corporations. PEA may only sell
these lands to Philippine citizens, subject to the ownership limitations in the 1987 Constitution and existing
laws.
2. The 592.15 hectares of submerged areas of Manila Bay remain inalienable natural resources of the public
domain until classified as alienable or disposable lands open to disposition and declared no longer needed for
public service. The government can make such classification and declaration only after PEA has reclaimed
these submerged areas. Only then can these lands qualify as agricultural lands of the public domain, which
are the only natural resources the government can alienate. In their present state, the 592.15 hectares of
submerged areas are inalienable and outside the commerce of man.
3. Since the Amended JVA seeks to transfer to AMARI, a private corporation, ownership of 77.34
hectares110 of the Freedom Islands, such transfer is void for being contrary to Section 3, Article XII of the 1987
Constitution which prohibits private corporations from acquiring any kind of alienable land of the public
domain.
4. Since the Amended JVA also seeks to transfer to AMARI ownership of 290.156 hectares 111 of still
submerged areas of Manila Bay, such transfer is void for being contrary to Section 2, Article XII of the 1987
Constitution which prohibits the alienation of natural resources other than agricultural lands of the public
domain. PEA may reclaim these submerged areas. Thereafter, the government can classify the reclaimed

123
lands as alienable or disposable, and further declare them no longer needed for public service. Still, the
transfer of such reclaimed alienable lands of the public domain to AMARI will be void in view of Section 3,
Article XII of the 1987 Constitution which prohibits private corporations from acquiring any kind of alienable
land of the public domain.
Clearly, the Amended JVA violates glaringly Sections 2 and 3, Article XII of the 1987 Constitution. Under Article
1409112 of the Civil Code, contracts whose "object or purpose is contrary to law," or whose "object is outside the
commerce of men," are "inexistent and void from the beginning." The Court must perform its duty to defend and
uphold the Constitution, and therefore declares the Amended JVA null and void ab initio.
Seventh issue: whether the Court is the proper forum to raise the issue of whether the Amended JVA is
grossly disadvantageous to the government.
Considering that the Amended JVA is null and void ab initio, there is no necessity to rule on this last issue. Besides,
the Court is not a trier of facts, and this last issue involves a determination of factual matters.
WHEREFORE, the petition is GRANTED. The Public Estates Authority and Amari Coastal Bay Development
Corporation are PERMANENTLY ENJOINED from implementing the Amended Joint Venture Agreement which is
hereby declared NULL and VOID ab initio.
SO ORDERED.